Key Takeaways
- ERISA (Employee Retirement Income Security Act) governs PRIVATE sector employee benefit plans.
- ERISA does NOT apply to government plans, church plans, or IRAs.
- Fiduciaries must act SOLELY in the interest of plan participants.
- The four fiduciary duties: Loyalty, Prudence, Diversification, Following plan documents.
- Prohibited transactions include self-dealing and receiving kickbacks.
- The prudent investor rule requires investing with care and diversification.
- An Investment Policy Statement (IPS) guides plan investment decisions.
- Fiduciaries who breach duties can be personally liable for plan losses.
Last updated: December 2025
ERISA and Fiduciary Obligations
ERISA (Employee Retirement Income Security Act of 1974) sets standards for private retirement plans to protect participants.
What ERISA Covers
Plans Covered by ERISA
| Plan Type | Covered |
|---|---|
| 401(k) Plans | Yes |
| Defined Benefit Pensions | Yes |
| 403(b) Plans (most) | Yes |
| Profit-Sharing Plans | Yes |
| SEP-IRAs | Yes |
| SIMPLE IRAs | Yes |
Plans NOT Covered by ERISA
| Plan Type | Reason |
|---|---|
| Government Plans | Exempt under ERISA |
| Church Plans | Can elect exempt status |
| Traditional IRAs | Not employer-sponsored |
| Roth IRAs | Not employer-sponsored |
| Non-qualified Plans | Outside ERISA scope |
ERISA Fiduciary Duties
A fiduciary is anyone who exercises discretionary authority over plan management, assets, or administration.
The Four Fiduciary Duties
| Duty | Requirement |
|---|---|
| Loyalty | Act SOLELY in the interest of participants and beneficiaries |
| Prudence | Act with care, skill, prudence, and diligence |
| Diversification | Diversify investments to minimize large loss risk |
| Plan Documents | Act in accordance with plan documents (if consistent with ERISA) |
Duty of Loyalty
| Requirement | Description |
|---|---|
| Exclusive Benefit | Decisions benefit participants, not fiduciary |
| No Conflicts | Avoid conflicts of interest |
| Reasonable Expenses | Only pay reasonable expenses |
| Sole Interest | No personal benefit from plan assets |
Duty of Prudence (Prudent Expert Rule)
Fiduciaries must act:
- With care, skill, prudence, and diligence
- Under circumstances then prevailing
- As a prudent person acting in like capacity
- With knowledge of such matters
Key Point: This is the "prudent expert" standard—a higher standard than just a "reasonable person."
Duty to Diversify
| Requirement | Details |
|---|---|
| General Rule | Diversify to minimize risk of large losses |
| Exception | If clearly prudent NOT to diversify |
| Consideration | Size, risk, geography, industry, etc. |
Duty to Follow Plan Documents
| Requirement | Limitation |
|---|---|
| Follow Terms | Administer according to plan documents |
| Exception | Unless inconsistent with ERISA |
| Amendments | Only follow valid amendments |
Exam Tip: ERISA fiduciaries must act SOLELY in the interest of plan participants. This is the highest standard of care—any conflict of interest or self-dealing is prohibited.
Prohibited Transactions
ERISA prohibits certain transactions between plans and "parties in interest."
What Are Parties in Interest?
| Party | Relationship |
|---|---|
| Fiduciaries | Those with discretionary authority |
| Plan Counsel | Attorneys for the plan |
| Service Providers | Record keepers, custodians |
| Employers | Contributing employers |
| Employee Organizations | Unions |
| Owners | 10%+ owners of employer |
| Family Members | Of any of the above |
Categories of Prohibited Transactions
| Category | Examples |
|---|---|
| Sale/Exchange | Selling property between plan and party in interest |
| Loans | Lending money or credit |
| Furnishing Services | Providing goods/services above reasonable value |
| Using Plan Assets | Self-dealing with plan assets |
| Fiduciary Self-Dealing | Acting on behalf of adverse party |
| Kickbacks | Receiving consideration from party dealing with plan |
Specific Prohibited Actions
| Action | Violation |
|---|---|
| Borrowing from the plan | Prohibited |
| Selling property to the plan | Prohibited |
| Receiving kickbacks | Prohibited |
| Using plan assets for personal benefit | Prohibited |
| Acting on behalf of party adverse to plan | Prohibited |
Investment Policy Statement (IPS)
An IPS provides guidelines for plan investment decisions.
IPS Components
| Component | Description |
|---|---|
| Investment Objectives | Goals for the plan |
| Risk Tolerance | Acceptable risk levels |
| Asset Allocation | Target allocation percentages |
| Investment Selection | Criteria for choosing investments |
| Rebalancing | When and how to rebalance |
| Monitoring | Performance review process |
| Responsibilities | Roles of fiduciaries and providers |
Benefits of an IPS
| Benefit | Description |
|---|---|
| Discipline | Provides framework for decisions |
| Documentation | Evidence of prudent process |
| Consistency | Reduces emotional decisions |
| Protection | Demonstrates fiduciary diligence |
Prudent Investor Rule
Key Principles
| Principle | Application |
|---|---|
| Portfolio Approach | Evaluate investments as part of total portfolio |
| Risk/Return | Consider relationship between risk and return |
| Diversification | Required unless imprudent |
| Process Focus | Judged by process, not just outcomes |
| Delegation | May delegate with proper oversight |
Modern Investment Standards
| Standard | Description |
|---|---|
| Total Return | Consider both income and appreciation |
| Consider Costs | Investment expenses matter |
| Review Regularly | Ongoing monitoring required |
| Documentation | Document decision-making process |
Penalties for Breach
Personal Liability
Fiduciaries who breach their duties may be:
- Required to restore plan losses
- Required to restore any profits from improper use of assets
- Removed as fiduciary
- Subject to civil penalties (20% of amount recovered)
- Subject to criminal penalties for willful violations
Excise Tax on Prohibited Transactions
| Violation | Tax Rate |
|---|---|
| Initial tax | 15% of amount involved |
| If not corrected | 100% of amount involved |
Exam Tip: Under ERISA, a fiduciary who loans money from the plan to themselves has committed a PROHIBITED TRANSACTION. This is a common exam question.
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Test Your Knowledge
ERISA applies to which of the following?
A
B
C
D
Test Your Knowledge
An ERISA fiduciary must act:
A
B
C
D
Test Your Knowledge
Under ERISA, a plan fiduciary who loans money from the plan to themselves has committed:
A
B
C
D
Test Your Knowledge
The prudent investor rule requires fiduciaries to:
A
B
C
D