Fiduciary Issues
Before you can understand what ERISA requires, you need to know what ERISA covers and who it holds responsible. This section establishes the framework for everything that follows.
What ERISA Covers
ERISA (Employee Retirement Income Security Act of 1974) is the federal law governing private-sector employee benefit plans - pension plans, 401(k)s, profit-sharing plans, and similar employer-sponsored retirement arrangements.
- Enacted to protect the retirement assets of American workers
- Sets minimum standards for plan management, funding, and disclosure
- Enforced primarily by the Department of Labor (DOL)
Exam Tip: Gotchas
- ERISA applies to private-sector employer plans only. Government plans (federal, state, local) and church plans are generally exempt. If a question describes a municipal pension fund, ERISA does not apply.
Who Is a Fiduciary?
Under ERISA, a fiduciary is anyone who:
- Exercises discretionary authority or control over plan management
- Exercises authority or control over plan assets
- Provides investment advice for compensation to the plan
This is a functional definition - it depends on what you do, not your title. A person who has no official role but influences investment decisions for pay can still be an ERISA fiduciary.
Exam Tip: Gotchas
- ERISA fiduciary status is based on function, not title. Anyone who exercises discretion over plan assets or provides advice for compensation qualifies, regardless of their job title.
The Four Core Fiduciary Duties
ERISA imposes four specific obligations on fiduciaries:
| Duty | What It Requires |
|---|---|
| Loyalty | Act solely in the interest of plan participants and beneficiaries |
| Prudence | Act with the care, skill, and diligence of a prudent expert |
| Diversification | Diversify plan investments to minimize the risk of large losses |
| Plan compliance | Follow plan documents (to the extent consistent with ERISA) |
The Prudent Expert Standard
The duty of prudence under ERISA is higher than the general "prudent person" standard used elsewhere in securities law:
- Prudent person: What would a reasonable person do?
- Prudent expert: What would a person familiar with such matters do in the conduct of an enterprise of like character?
This means fiduciaries are held to a professional standard - ignorance is not a defense. If you serve as an ERISA fiduciary, you are expected to have (or obtain) the expertise needed to manage plan assets competently.
Key points about the prudence standard:
- Prudence is measured objectively - good faith alone is not enough
- ERISA focuses on process, not outcomes; a loss does not automatically mean a breach
- Fiduciaries must document their decision-making process to show they followed prudent procedures
Exam Tip: Gotchas
- The ERISA prudence standard is "prudent expert," not "prudent person." This distinction is frequently tested. ERISA fiduciaries are held to a higher, professional standard of care.
Investment Choice Obligations
Plan sponsors and fiduciaries have specific responsibilities regarding the investment options they offer:
- Must offer a prudent range of diversified investment options
- Participants should have sufficient choices to construct a diversified portfolio
- Must consider fees and expenses of each investment option
- Must monitor and periodically review investment options; selecting them once is not enough
- Must remove imprudent investments within a reasonable time
Personal Liability
Fiduciaries are personally liable for losses resulting from breaches of their duties. A fiduciary who acts imprudently can be required to restore the plan's losses out of their own pocket.