Quick Answer
The Employee Retirement Income Security Act (ERISA) sets fiduciary standards for private employer retirement plans. Fiduciaries owe loyalty, prudence (the prudent expert standard), diversification, and adherence to plan documents. Prohibited transactions with parties in interest are strict liability, and a safe harbor shields fiduciaries when participants direct their own accounts.
The whole unit on one sheet: who is a fiduciary, the four duties, the safe harbors, and the prohibited transactions the exam loves.
The One-Liners That Win Points
- ERISA covers PRIVATE employer plans (401(k), 403(b), defined benefit, defined contribution, employer SEP and SIMPLE IRAs). It is enforced by the Department of Labor (DOL), not the SEC.
- Fiduciary is a functional definition: you are one by what you DO (discretion over plan management or assets, or investment advice for compensation), not by your title.
- The four core duties: loyalty (exclusive benefit rule), prudence (prudent expert rule), diversification, and following plan documents that comply with ERISA.
- A 3(21) investment adviser recommends and shares liability with the sponsor; a 3(38) investment manager has full discretion and assumes fiduciary liability, transferring it off the sponsor for delegated decisions.
- An Investment Policy Statement (IPS) is NOT required by ERISA statute, but the DOL expects one as evidence of a prudent process. Once adopted, you MUST follow it.
- Prohibited transactions are strict liability: intent does not matter. A well-meaning short-term loan from the plan to the employer is still prohibited.
- Paying a party in interest reasonable compensation for necessary services is exempt. Without this exemption a plan could hire nobody, since every service provider is automatically a party in interest.
Numbers to Lock In
| Item | Value |
|---|---|
| Participant-directed safe harbor investment choices | at least 3 diversified alternatives |
| Transfer frequency among options | at least once per quarter (every 3 months) |
| Capital-preservation Qualified Default Investment Alternative (QDIA) window | permitted only for the first 120 days of participation |
| QDIA advance written notice | at least 30 days before first investment, then annually |
| QDIA free-transfer window | no fees or restrictions during the first 90 days |
| Employer securities or real property cap in a plan | generally 10% of plan assets |
| Party-in-interest ownership threshold | 50%+ owners and 50%+ owned entities |
Top Gotchas
- ERISA covers private plans only. Government plans (federal, state, local) and church plans are statutorily exempt, and individual IRAs are set up by individuals, not employers, so they fall outside ERISA.
- A 401(k) rolled into an IRA is no longer an ERISA plan and loses ERISA's unlimited federal creditor protection, dropping to state-law and bankruptcy-exemption coverage.
- The prudent expert standard is higher than the common-law prudent man rule because it assumes specialized knowledge ("familiar with such matters"). Do not confuse it with the Uniform Prudent Investor Act, which governs personal-trust trustees.
- The participant-directed safe harbor does NOT relieve the duty to prudently select and monitor the options. It only shields fiduciaries from losses caused by the participant's own choice among those options.
- A capital-preservation fund qualifies as a QDIA only for the first 120 days; after that, contributions must move to a target-date, balanced, or managed-account default.
- The IPS is a double-edged sword: it demonstrates prudence, but failing to follow your own IPS is itself a fiduciary breach.
- A party in interest reaches wide: fiduciaries, service providers, the sponsoring employer, covered unions, major owners, and relatives (spouse, ancestors, lineal descendants).
One-Breath Recap
The Employee Retirement Income Security Act (ERISA) governs private employer retirement plans and is enforced by the Department of Labor, not the SEC, so government, church, and individual-IRA plans are out. A fiduciary is defined by function, and owes loyalty, prudence under the higher prudent expert standard, diversification, and adherence to compliant plan documents. A 3(38) manager takes on discretion and liability that a 3(21) adviser shares; an IPS is optional but binding once adopted. Prohibited transactions with parties in interest are strict liability with narrow exemptions for reasonable-compensation services and participant loans, while the participant-directed safe harbor shields fiduciaries from participants' own investment choices but never from the duty to select and monitor the options prudently.
Need more than the recap? This is a condensed summary. If it is not enough, read the full ERISA Issues unit for the complete lesson.