ERISA Issues

The whole unit on one sheet: who is a fiduciary, the safe harbor, the Investment Policy Statement, and the transactions ERISA forbids.

The One-Liners That Win Points

• ERISA applies to private-sector employer plans only. Government (federal, state, local) and church plans are generally exempt; a municipal pension fund is not covered.
• Fiduciary status is functional, not by title. Anyone with discretionary control over plan assets, or who gives investment advice for compensation, qualifies.
• The prudence standard is "prudent expert," not "prudent person." Ignorance is no defense; fiduciaries are held to a professional standard.
• ERISA focuses on process, not outcomes. A loss alone is not a breach; good faith alone is not enough because prudence is measured objectively.
• Fiduciaries are personally liable for losses from a breach and can be forced to restore them out of pocket.
• The Department of Labor (DOL) is the primary enforcer and can grant exemptions; the IRS imposes excise taxes.

Numbers to Lock In

The Four Core Fiduciary Duties

• 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 investments to minimize the risk of large losses.
• Plan compliance: follow plan documents, to the extent consistent with ERISA.
• Sponsors must offer a prudent range of diversified options, weigh fees and expenses, and monitor and periodically review them; selecting once is not enough.

The Participant-Directed-Plan Safe Harbor

• Shields fiduciaries from losses caused by participants' own investment choices in self-directed plans.
• Requires all of: at least 3 diversified options with materially different risk/return profiles, transfers at least quarterly, sufficient information to make informed decisions, and independent control by participants.
• Does NOT relieve the duty to prudently select and monitor the options offered.
• Does NOT protect against losses from imprudent options, or apply when a fiduciary pressured or directed a participant's choices.

Investment Policy Statement (IPS)

• A written rulebook setting investment guidelines, objectives, and constraints for the plan.
• Not legally required by ERISA, but the DOL strongly promotes it; courts look for it (or its absence) when judging fiduciary conduct.
• Provides contemporaneous evidence of prudence and consistency across committees and time.
• Typical components: plan objectives, asset allocation targets and ranges, selection and monitoring criteria, performance benchmarks, rebalancing policy, and roles and responsibilities.

Prohibited Transactions

• ERISA bars dealings between the plan and parties in interest (fiduciaries, service providers, the employer and affiliates, unions, certain relatives, participant-fiduciaries).
• Banned: sale, exchange, or lease of property; lending or extending credit; furnishing goods, services, or facilities; transferring or using plan assets for a party in interest; fiduciary self-dealing; and receiving kickbacks.
• Necessary-services exception: a party in interest may provide necessary services for reasonable compensation (record-keeping, legal, accounting) with no other prohibited transaction involved.
• Self-dealing and kickbacks are always prohibited; there is no reasonable-compensation exception for putting your own interests first.
• Violations trigger IRS excise taxes and personal liability; the transaction must be unwound to make the plan whole.

Top Gotchas

• The IPS is not required by ERISA. The DOL recommends it; its absence just makes fiduciary decisions harder to defend.
• The safe harbor minimum is 3 diversified options, not 2 and not 5, with transfers at least quarterly, not annually.
• The safe harbor never eliminates all liability. Fiduciary selection and monitoring duties stay fully intact.
• Know which agency does what: the DOL enforces and grants exemptions; the IRS imposes the excise taxes.
• A record-keeper charging market rates is allowed (necessary service, reasonable compensation); a trustee selling their own property to the plan, or hiring a spouse's firm above market, is prohibited.

One-Breath Recap

ERISA covers private-sector retirement plans and defines a fiduciary by function, holding anyone with discretion over plan assets to a prudent-expert standard across four duties: loyalty, prudence, diversification, and plan compliance. Prudence is judged by process, not outcomes, and the Investment Policy Statement is the main tool for documenting that process even though ERISA does not require it. The participant-directed-plan safe harbor shields fiduciaries from participant-choice losses only when the plan offers at least three diversified options, quarterly transfers, sufficient information, and independent control, but it never excuses failing to select and monitor those options. Prohibited-transaction rules bar dealings with parties in interest (except necessary services at reasonable compensation), with self-dealing and kickbacks always off-limits. When violations occur, the DOL enforces and grants exemptions, the IRS levies excise taxes, and the fiduciary is personally on the hook.

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.