12.1 ERISA Requirements

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry. Understanding ERISA is essential for investment advisers who work with employer-sponsored retirement plans.

ERISA Coverage

Plans Subject to ERISA

ERISA applies to most private sector employer-sponsored plans:

Plans NOT Subject to ERISA

Fiduciary Responsibilities

ERISA imposes strict duties on anyone who exercises discretionary authority or control over a plan. This creates a higher standard than ordinary care.

The Prudent Expert Rule

ERISA requires fiduciaries to act with the care, skill, prudence, and diligence that a prudent expert familiar with such matters would use. This is a higher standard than the "prudent person" rule:

Courts evaluate the process of decision-making, not just the outcome. A bad investment result does not automatically mean a breach of duty if the decision was made prudently.

Core Fiduciary Duties

1. Duty of Loyalty (Exclusive Benefit Rule)

• Act solely in the interest of plan participants and beneficiaries
• Use plan assets exclusively for providing benefits or paying reasonable expenses
• Cannot favor one group of participants over another

2. Duty of Prudence

• Investigate investments before recommending
• Monitor investment options regularly
• Compare fees against marketplace rates
• Document decision-making process

3. Duty to Diversify

• Spread investments to minimize large losses
• Consider concentration risk
• Exception: Company stock may be offered but cannot be required

4. Duty to Follow Plan Documents

• Administer plan according to its terms
• Cannot deviate even if deviation would benefit participants

Who Is a Fiduciary?

ERISA defines fiduciaries functionally—based on what they do, not their title:

On the Exam: The exam tests whether someone is a fiduciary based on their actions, not their job title. A person providing discretionary investment advice for compensation is a fiduciary, regardless of what they call themselves.

Prohibited Transactions

ERISA Section 406 prohibits certain transactions between plans and "parties in interest" to prevent self-dealing and conflicts of interest.

Types of Prohibited Transactions

Parties in Interest

• Plan fiduciaries, trustees, and administrators
• Employers sponsoring the plan
• Employee organizations (unions)
• Service providers to the plan
• Relatives of any of the above

Consequences of Breach

Disclosure Requirements

Summary Plan Description (SPD)

The SPD is the primary document explaining the plan to participants:

• Written in understandable language
• Provided within 90 days of becoming a participant
• Updated when material changes occur
• Describes eligibility, benefits, vesting, and claims procedures

Form 5500 Annual Report

• Filed annually with Department of Labor
• Financial statements and participant data
• Available to participants on request
• Due 7 months after plan year end

Participant Benefit Statements

Key Takeaways

1. ERISA applies to private sector employer plans, not government, church, or individual plans
2. The prudent expert rule is higher than ordinary prudence—based on specialized knowledge
3. Fiduciary status is determined by function (actions), not job title
4. Prohibited transactions include self-dealing and transactions with parties in interest
5. Key disclosures include SPD, Form 5500, and benefit statements