Fiduciary Duties and Prohibited Transactions
The Five Duties
ERISA section 404(a) imposes prudence, loyalty (exclusive benefit), diversification, compliance with plan documents, and reasonable fees. The prudent expert standard is objective: what a knowledgeable person acting in a like capacity would do. The loyalty duty requires acting solely in the interest of participants and beneficiaries.
Who Is a Fiduciary
Fiduciaries include named fiduciaries, those exercising discretionary authority over management or disposition of assets, and those rendering investment advice for a fee. Ministerial functions are not fiduciary. A person can be a fiduciary for one function and not another.
Prohibited Transactions
Section 406 prohibits self-dealing, representing adverse parties, and certain party-in-interest dealings. Exemptions exist under statutory provisions (408(b)(2) for reasonable arrangements) and administrative class exemptions. The distinction between a prohibited transaction and a fiduciary breach matters: a prohibited transaction can occur even without a breach of prudence.
Traps That Appear
- Assuming a plan sponsor is always a fiduciary for settlor decisions; plan design is a settlor function.
- Missing co-fiduciary liability under section 405 when a fiduciary knows of another's breach and fails to act.
- Confusing the prohibited transaction excise tax under Code 4975 with ERISA remedies.
- Overlooking that participant-directed investments shift some responsibility, but only if 404(c) requirements are met.
Worked Example
A trustee hires an affiliate to provide recordkeeping without checking the fee arrangement. Even if the fee is reasonable, the arrangement is a party-in-interest transaction unless an exemption applies. The fix is procedural: document the exemption and the reasonableness analysis.