Assignment 10 - Fiduciary and Ethical Responsibility Flashcards
ERISA
Employee Retirement Income Security Act
ERISA went beyond common law of trusts in the following respects in establishing the following standards
- sole benefit standard
- prudent expert rule
- diversification rule
- plan document rule
- prohibited transaction rule
How does the prudent expert rule under ERISA differ from traditional prudent man rule under the common laws of trust
- fiduciary under ERISA must invest plan assets not in the same way he would invest personal assets but how similar plans are being invested
- must exercise the skill of an expert in the mgmt of pension plans
- focus is not on performance of individual plan but how it contributes to the net performance of the pension portfolio as a whole
Under prudent expert rule, fiduciary should weigh risk vs opportunity for gain, taking into consideration the following elements:
- liquidity and current return relative to the liquidity requirements
- projected return of the portoflio relative to the funding objectives of the plan
- composition of the portfolio with regard to diversification
a prohibited transaction occurs under ERISA if a fiduciary causes the plan to engage in a transaction with a party in interest that would constitute the:
- sale or exchange, or leasing, of any property between the plan and a party in interest
- **lending of money or extension of credit **between the plan and a party in interest
- **funishing of goods/services/facilities **between the plan and a party in interest
- transfer of assets between the plan and a party in interest
- acquisition of a security
broadly defined as including nearly everyone who has a direct or indirect association with a plan
“party in interest”
ERISA defines a plan fiduciary as any person who:
- exercises any discretionary authority or control over the management of the plan
- exercises any discretionary authority or control concerning the mgmt or disposition of its assets
- exercises any discretionary authority or responsibilty in the administration of the plan
Are professional service providers to a plan considered fiduciaries?
NO - unlikely to be considered fiduciaries
Penalties involved if a plan fiduciary breaches the fiduciary requirements of ERISA
- held personally responsible for any losses
- liable to restore any profits realized through improper use of plan assets
Penalties imposed on fiduciary for engaging in an illegal transaction
- excise tax of 15% of the involved amount in the transaction (increases to 100% upon failure to remedy upon notification)
May the plan contain a provision relieving fiduciary of personal liability
NO - not under ERISA
Every fiduciary of an employee benefit plan and every other person who handles plan funds or property is required to be bonded, naming the plan as insured, in an amount fixed at the beginning of each plan year as not less than 10% of the amount of funds handled but in no event less than $1000
bonding requirments for fiduciaries
How is an ERISA plan, fund or program established
a reasonable person can ascertain:
- the intended benefits
- class of beneficiaries
- source of financing
- procedures for receiving benefits
an employee or former employee who is or may become eligible to receive a benefit, or whose beneficiaries may become eligible to receive a benefit
participant
An employer cannot terminate an employee to avoid benefit coverage or benefit claims. They can change plan design even if it has an adverse impact on one employee or groups of employees
level of protection of ERISA Section 510
