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ERISA and the fiduciary duty to monitor appointed investment advisers, P.1

For employers, one important aspect of doing business is ensuring the business is in compliance with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA), the federal law which lays out the rules and regulations for setting up and administering employee health and retirement plans. Of particular importance under ERISA are the fiduciary duties associated with management of retirement plan investments.

Fiduciaries associated with employee retirement accounts are required to administer the plan for the sole benefit of plan participants and beneficiaries. Part of what this entails is prudent management of retirement investments, including diversification to minimize risk of significant losses. Fiduciaries who fail to act prudently in managing investments can be held personally liable for plan losses.  

Under ERISA, a fiduciary is any person who has discretionary authority, responsibility or control over plan assets or the administration of the plan, or who provides investment advice for a fee. This includes the employer, the retirement plan administrator, and various other parties. It also includes plan trustees, which are entities or groups of individuals holding retirement plan assets in trust. Trustees are designated in the retirement plan document or appointed by a fiduciary.

While fiduciaries can be held liable for mismanagement of a retirement plan, trustees of 401(k) plans are not liable for the acts and omissions of investment managers appointed by named fiduciaries. The exact limits of this rule are important to understand, though, because it can impact how employers, as fiduciaries, monitor the investment advisers they appoint to manage the retirement plans they sponsor.

In our next post, we’ll look at a recent federal case involving this issue, as well as the fiduciary duty to monitor investment advisers, and the impact it could have on how employers approach these matters

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