The Employee Retirement Income Security Act ("ERISA") creates obligations for financial advisors, money managers and brokerage firms in provide investment advice for qualified employee benefit plans.
The goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans. Among other things, ERISA requires that sponsors of private employee benefit plans provide participants and beneficiaries with adequate information regarding their plans. Also, those individuals who manage ERISA plans must meet certain standards of conduct, derived from the common law of trusts and made applicable to all fiduciaries. ERISA requires investment professionals to act in a prudent manner as a fiduciary. ERISA also contains detailed provisions for reporting to the government and disclosure to participants. There are civil enforcement provisions aimed at assuring that ERISA plan funds are protected and that participants who qualify receive their benefits.
ERISA advisors have a duty to make sure that investments are suitable for the strategy of the ERISA plan. ERISA Section 404 imposes certain fiduciary responsibilities on plan fiduciaries that are grounded in basic principles of trust law. In addition, the prohibited transaction rules of ERISA Section 406 expand those fiduciary responsibilities well beyond basic trust principles. Anyone who assumes discretionary authority with respect to an ERISA plan administration or plan assets is a plan fiduciary, which means that a lawyer or another advisor can assume this status unwittingly.
ERISA requires that a fiduciary act "solely in the interest of the plan's participants and beneficiaries," for the "exclusive purpose" of providing plan benefits and defraying reasonable administrative expenses, and with the care, skill, prudence, and diligence of a similarly situated prudent person. ERISA also requires fiduciaries to diversify plan investments and, to comply with plan documents to the extent that they are ERISA compliant. ERISA fiduciaries have a responsibility to manage.
An ERISA fiduciary who commits a breach of any fiduciary duty can be held personally liable for any loss to the plan that results from such breach, plus a civil penalty of 20 percent of such loss. The Supreme Court has ruled that courts may award damages to participants in fiduciary breach actions under certain circumstances. The defalcating fiduciary also may be removed from her position as a fiduciary.
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