ERISA Issues

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

Which One-Liners Win Points?

• ERISA applies to private-sector employee benefit plans only (employer, employee organization such as a union, or both). 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 management or administration, any authority or 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.

Which Numbers Matter Most?

What Are 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, unless clearly prudent not to.
• Plan compliance: follow plan documents, to the extent consistent with ERISA.
• As part of general prudence, sponsors should select a prudent, diversified range of options, weigh fees and expenses, and monitor and periodically review them (selecting once is not enough); a separate, specific menu requirement applies only to plans seeking participant-directed safe-harbor protection.

When Does the Participant-Directed Safe Harbor Apply?

• Shields fiduciaries from losses caused by participants' own investment choices in self-directed plans.
• Applies only to individual account plans (such as 401(k) plans). Requires all of: at least 3 diversified options with materially different risk/return profiles, transfers generally at least quarterly, sufficient information (including notice the plan intends to operate under the safe harbor), and independent control by participants. Protection is transaction-specific: it covers only losses that directly and necessarily result from the participant's own instructions.
• Does NOT protect against losses from imprudent options, or apply when a fiduciary pressured or directed a participant's choices.

What Does the Investment Policy Statement Do?

• A written rulebook setting investment guidelines, objectives, and constraints for the plan.
• 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.

Which Transactions Are Prohibited?

• ERISA bars dealings between the plan and parties in interest (a defined list including fiduciaries, service providers, the employer and its employees, officers, and directors, unions, certain relatives, participant-fiduciaries, among others).
• 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; acting for a party whose interests are adverse to the plan; and receiving kickbacks.
• That list is representative, not the full statutory list, and "the employer" is broader than it sounds: any employee, officer, or director of the sponsoring employer counts, even with no plan role at all. A customer of the employer, a competitor, or a government regulator overseeing the plan does not count.
• Certain relatives count regardless of age. A lineal descendant (child or grandchild) of a party in interest such as a fiduciary is itself a party in interest, minor or grown adult, involved in the plan or not.
• Self-dealing and kickbacks have no reasonable-compensation exception; putting your own interests first is prohibited by default, though the DOL can grant other administrative (individual or class) exemptions.
• Violations can trigger IRS excise taxes and personal fiduciary liability; the transaction generally must also be corrected (unwound, to the extent possible) to restore the plan's position.

Which Gotchas Trip Students Up?

• Qualified Default Investment Alternative (QDIA): when a participant never makes an election, the plan may default them into a QDIA and keep the safe harbour. A capital-preservation option qualifies only for the first 120 days; after that the default must be a long-horizon vehicle such as a target-date or balanced fund.
• 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: discretionary control over plan management or assets, or paid investment advice, all held to a prudent-expert standard across four duties (loyalty, prudence, diversification, plan compliance). Prudence is judged by process, not outcomes, and the Investment Policy Statement documents it even though ERISA does not require one. 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), and self-dealing and kickbacks need a Department of Labor exemption; the Department enforces, the IRS levies excise taxes, and the fiduciary can be personally liable.

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