Apply ERISA Fiduciary Standards - Series 65

1. What is an ERISA fiduciary, in functional terms, based on actions taken?

   One who exercises discretionary authority over plan assets/administration. ERISA defines a fiduciary functionally as anyone exercising discretion over plan management or assets, regardless of formal title.

2. What is the ERISA "exclusive benefit" rule for plan fiduciaries?

   Act solely in participants' and beneficiaries' interests. ERISA's exclusive benefit rule mandates fiduciaries to manage plan assets solely for the benefit of participants and beneficiaries.

3. Under ERISA, what is the general rule about a fiduciary receiving compensation from a third party?

   Generally prohibited unless an exemption applies. ERISA restricts third-party compensation to fiduciaries to prevent conflicts, allowing it only under specific exemptions.

4. What is the ERISA prudence standard often called for fiduciary decision-making?

   Prudent expert standard under similar circumstances. ERISA requires fiduciaries to act with the care, skill, prudence, and diligence of a prudent expert in similar circumstances.

5. What is "fiduciary self-dealing" under ERISA's prohibited transaction rules?

   Fiduciary acts in own interest in a plan-related transaction. ERISA prohibits fiduciaries from acting in transactions where their own interests conflict with the plan's to uphold loyalty.

6. What is the most common exemption concept that can permit plan service provider compensation?

   Reasonable compensation for necessary services. ERISA exemptions permit compensation if it is reasonable and for services essential to the plan's operation.

7. What does ERISA require regarding diversification of plan investments?

   Diversify to minimize large losses unless clearly imprudent. ERISA's diversification rule aims to reduce risk of significant losses by spreading investments, unless diversification is clearly imprudent.

8. What legal standard generally applies to an investment adviser under the Investment Advisers Act of 1940?

   Fiduciary duty to act in the client's best interest. The Investment Advisers Act of 1940 imposes a fiduciary standard on advisers, requiring them to prioritize clients' best interests above their own.

9. What is the primary purpose of a QDIA safe harbor for plan fiduciaries?

   Limits fiduciary liability for default investment outcomes if rules met. QDIA provides fiduciaries safe harbor protection from liability for investment losses if selection and monitoring rules are followed.

10. What is an ERISA "party in interest" in general terms?

    Persons/entities with close relationships to the plan (e.g., employer, fiduciaries). ERISA identifies parties in interest as those with potential conflicts, such as employers or fiduciaries, to prevent self-serving transactions.

11. Identify the prohibited transaction: a plan lends money to the sponsoring employer.

    Prohibited transaction: lending plan money to a party in interest. Lending to a party in interest like the employer is prohibited under ERISA to avoid conflicts and ensure assets benefit participants.

12. Which option is a typical QDIA: managed account, collectibles, or municipal bond ladder?

    Managed account. Managed accounts can be QDIAs if professionally managed with diversification, contrasting non-qualifying options like collectibles.

13. Which standard is typically higher for an adviser: fiduciary duty or broker-dealer suitability?

    Fiduciary duty is higher than suitability. Fiduciary duty requires acting in the client's best interest, exceeding suitability which only demands reasonable basis for recommendations.

14. Which option is a typical QDIA: target-date fund, money market fund, or employer stock?

    Target-date fund. Target-date funds qualify as QDIAs due to their age-based asset allocation, providing diversification unlike money markets or employer stock.

15. Identify the prohibited transaction: a plan buys real estate directly from the employer.

    Prohibited transaction: sale/exchange of property with a party in interest. Direct property sales to parties in interest are barred by ERISA to prevent unfair dealings and maintain plan integrity.

16. What does ERISA require regarding plan documents when investing plan assets?

    Follow plan documents insofar as consistent with ERISA. Fiduciaries must adhere to plan documents to ensure investments align with ERISA's protective provisions for participants.

17. What does the fiduciary duty of care require when providing advice?

    Prudent, competent advice based on client objectives. Duty of care mandates advisers to provide advice that is prudent and competent, tailored to the client's specific financial goals and situation.

18. Identify the prohibited transaction: a fiduciary uses plan assets to benefit the fiduciary personally.

    Prohibited: self-dealing and use of plan assets for own interest. Fiduciary self-dealing is prohibited under ERISA to ensure plan assets are used exclusively for participants' benefit, not personal gain.

19. What does the fiduciary duty of loyalty require regarding conflicts of interest?

    Full and fair disclosure and informed client consent. To uphold loyalty, advisers must disclose all material conflicts fully and fairly, obtaining client consent to ensure decisions benefit the client.

20. What are the two core fiduciary duties an investment adviser owes to clients?

    Duty of care and duty of loyalty. Fiduciary obligations under the Act encompass duty of care, ensuring suitable advice, and duty of loyalty, avoiding conflicts without disclosure.

21. Which option is a typical QDIA: balanced fund, single-sector fund, or individual stock?

    Balanced fund. Balanced funds meet QDIA criteria with diversified equity and fixed-income holdings, unlike sector-specific or individual investments.

22. What is an ERISA "prohibited transaction" in general terms?

    Certain dealings between a plan and a party in interest. Prohibited transactions under ERISA include specific dealings with parties in interest to protect plan assets from exploitation.

23. What is the key condition for an ERISA service provider arrangement to avoid prohibited transaction issues?

    Services necessary and compensation reasonable. To qualify for exemptions, service arrangements must involve necessary services with compensation that is fair and reasonable.

24. What participant right must be preserved for QDIA treatment regarding defaulted assets?

    Ability to transfer out with no penalty (at least initially). QDIA rules require participants to have the right to transfer default investments without penalties to ensure flexibility and protection.

25. What is a QDIA in a retirement plan context?

    Qualified Default Investment Alternative for automatic contributions. QDIA serves as a default investment option for unenrolled participants in plans with automatic enrollment features.

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