Understanding ERISA Fiduciary Duties

The Employee Retirement Income Security Act (“ERISA”) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry.  ERISA provides protection for individuals in such plans. Central to ERISA is the concept of fiduciary duty, which mandates that those managing and controlling plan assets act in the best interests of plan participants.  Understanding and adhering to these fiduciary duties is critical for employers, plan administrators, and trustees. This blog explores the key aspects of ERISA fiduciary duties. 

Who is a Fiduciary?   

Under ERISA, a fiduciary is anyone who: 

  • Exercises discretion with respect to the management or administration of the plan or the management or disposition of plan assets. 
  • Provides investment advice for a fee or other compensation regarding plan assets. 

In short, if you make decisions about a plan’s investments, manage the plan’s assets, or have authority to do so, you are a fiduciary. 

Primary Fiduciary Duties. 

ERISA provides several key duties that fiduciaries must follow.  ERISA’s fiduciary standards are often referred to as the “highest standard of care” in the financial world. 

  1. Duty of Loyalty: Fiduciaries must act solely in the interest of plan participants and beneficiaries with the exclusive purpose of providing benefits and defraying reasonable plan expenses.  This means prioritizing participants’ interests over the fiduciary’s own interests or those of any third party. 
  2. Duty of Prudence: Fiduciaries are required to carry out their duties with the care, skill, prudence, and diligence that a prudent person familiar with such matters would use.  To meet this standard, it often involves conducting thorough research, seeking expert advice, and making informed decisions. 
  3. Duty to Diversify Investments: Fiduciaries must diversify plan investments to minimize the risk of large losses.  This helps protect the plan from significant losses due to investment volatility. 
  4. Duty to Follow Plan Documents:  Fiduciaries are required to adhere to the plan document, unless contrary to ERISA. This includes following the plan’s terms, policies, and procedures, including any amendments. 

Avoiding Prohibited Transactions. 

ERISA provides for broad prohibitions of certain transactions designed to prevent conflicts of interest and self-dealing.  In general, fiduciaries must avoid transactions between the plan and parties-in-interest, which include: 

  • Sales, exchanges, or leases of property. 
  • Lending money or other extensions of credit. 
  • Furnishing goods, services, or facilities. 

 To account for these broad prohibitions, ERISA provides for certain statutory exemptions.  Additionally, fiduciaries may seek individual exemptions from the Department of Labor (“DOL”) if a transaction is believed to be beneficial for the plan and its participants. 

Monitoring and Documentation. 

Fiduciaries have an ongoing duty to monitor and review plan investments and service providers.  Regularly reviewing performance, fees, and any changes in the financial landscape is critical.  Additionally, maintaining thorough documentation of all decisions and the rationale behind them is essential.  Such supporting documentation pays dividends if a fiduciary decision is ever questioned. 

Consequences of Breaching Fiduciary Duties. 

Failing to adhere to fiduciary duties can lead to severe consequences, including but not limited to: 

  • Personal liability for any losses to the plan resulting from the breach. 
  • Restoration of any profits made through the improper use of plan assets. 
  • Potential civil liability. 

Considering these material risks, fiduciaries should consider obtaining fiduciary liability insurance and ensuring they are well versed in ERISA requirements. 

Best Practices for ERISA Fiduciaries. 

A few best practices to help fiduciaries effectively fulfill their duties include: 

  • Stay Educated: Stay informed about ERISA regulations and fiduciary responsibilities. 
  • Consult Experts: Engage the support of financial advisors, legal counsel, and other professionals as needed. 
  • Establish Formal Procedures: Develop and follow a robust process for making decisions, monitoring investments, and documenting decisions and actions. 
  • Regularly Review Plans: Conduct periodic reviews of plan performance, fees, and compliance with legal requirements. 
  • Be Mindful of Communications: Ensure transparent communication with plan participants about their benefits and any significant changes to the plan. 

How can BrownWinick assist you? 

By understanding and diligently adhering to these fiduciary duties, those responsible for managing employee benefit plans can better protect the interests of participants and beneficiaries, fulfilling their role with integrity and prudence. If requested, BrownWinick can assist you in understanding your fiduciary duties as well as developing best practices and documented policies and procedures. Contact Caleb Brus at 515-558-8867. 

This is for general informative purposes only, is not a comprehensive overview of the ERISA fiduciary duties and should not be construed or relied upon as legal advice. BrownWinick will not be responsible for ERISA fiduciary duties legal advice for any entity unless an engagement is confirmed in writing by BrownWinick.