Quick Answer
The Employee Retirement Income Security Act (ERISA) governs private-sector retirement plans. A fiduciary is defined by function (discretionary control over plan management or administration, any authority or control over plan assets, or paid investment advice), not title, and owes four duties: loyalty, prudence (to a "prudent expert" standard), diversification, and plan compliance. Fiduciaries who breach these duties are personally liable for plan losses.
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 employee benefit plans only (plans established by an employer, an employee organization such as a union, or both). 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 or administration
- 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 discretionary control over plan management or administration, exercises authority or control 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 (unless clearly prudent not to) |
| 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. Anyone acting as an ERISA fiduciary is 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 should document their decision-making process; documentation helps demonstrate 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
As part of the general duty of prudence, plan sponsors and fiduciaries should:
- Select and offer a prudent, diversified range of investment options (a broader set of specific requirements applies separately to plans seeking participant-directed safe-harbor protection)
- Give participants 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.
What Should You Check on Exam Day?
- ERISA covers private-sector plans only; government and church plans are generally exempt
- Fiduciary status is functional (discretionary control over plan management or administration, any authority or control over plan assets, or paid investment advice), not based on job title
- The four duties are loyalty, prudence (prudent expert, not prudent person), diversification (unless clearly prudent not to), and plan compliance
- Prudence is judged by process, not outcomes; a loss alone is not automatically a breach
- Fiduciaries are personally liable and can be required to restore plan losses out of pocket