ERISA Issues

The whole unit on one sheet: who is a fiduciary, the four duties, the safe harbors, and the prohibited transactions the exam loves.

Which One-Liners Win Points?

• ERISA covers PRIVATE employer plans (401(k), 403(b) with sufficient employer involvement, 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.

Exam Tip: Gotchas

• 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.

Which Numbers Matter Most?

Exam Tip: Gotchas

• A 401(k) rolled into an IRA is no longer an ERISA plan. Outside bankruptcy it depends on state creditor-protection law rather than ERISA's federal shield; in bankruptcy, the federal exemption caps ordinary IRA contributions at $1,711,975 (April 2025 through March 2028), but amounts rolled over from an employer plan do not count toward that cap and stay fully exempt.
• The Investment Policy Statement 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. The term covers fiduciaries, service providers, the sponsoring employer, covered unions, major owners, and relatives (spouse, ancestor, lineal descendant, or spouse of a lineal descendant).

One-Breath Recap

The Employee Retirement Income Security Act governs private employer retirement plans and is enforced by the Department of Labor, not the SEC, so government and individual-IRA plans are out, and church plans are out unless they elect coverage. 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 only shares; an Investment Policy Statement 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 choices but never from the duty to select and monitor the options prudently.

Need more than the recap? Read the full ERISA Issues unit.