A manufacturing company hires a financial planner, an IAR of a state-registered investment adviser, for a discrete project: recommending an investment menu for the company's new 401(k) plan. The engagement letter states that the plan's investment committee will treat the recommendations as the primary basis for its fund selections, and the recommendations are tailored to the company's workforce. The planner completes the recommendations in six weeks, receives a flat $15,000 fee from the company's operating account, and retains no ongoing role: the committee will make all future decisions, and the planner will not monitor the menu or provide further advice.
Under ERISA, is the financial planner a fiduciary with respect to the plan? Answer: No, because the engagement is a one-time project and the planner is not providing advice on a regular basis or under any continuing authority.
ERISA § 3(21)(A) and Department of Labor Regulation § 2510.3-21(c). Under the five-part test for fiduciary investment advice, advice creates ERISA fiduciary status only if it is individualized, is rendered on a regular basis, and is given under a mutual understanding that it will serve as the primary basis for the plan's investment decisions. The engagement letter supplies the primary-basis understanding, and the recommendations are tailored to the workforce, but the work is a discrete one-time engagement with no ongoing role, so the regular-basis element fails and the planner is not a fiduciary. The statement that the committee's reliance and the fee create fiduciary status ignores the regular-basis requirement, as does the statement that any paid, individualized advice is fiduciary even if given only once. The fee-source explanation is wrong because ERISA covers advice rendered for compensation that is direct or indirect, whether the payer is the plan, the employer, or anyone else.
An investment manager with discretionary authority over the assets of an ERISA-covered pension plan is considering adding a mutual fund managed by its own advisory affiliate to the plan's portfolio. The fund's five-year performance record is nearly identical to that of comparable funds, and its expense ratio is in the middle of its category.
Under ERISA, which statement is correct? Answer: The investment is a prohibited transaction because the manager would be dealing with plan assets for its own account, even if the terms are fair.
ERISA § 406(b)(1) prohibits a fiduciary from dealing with the assets of a plan in the fiduciary's own interest or for the fiduciary's own account. Causing the plan to purchase shares of a fund managed by the manager's own affiliate is self-dealing, and the transaction is prohibited regardless of the fund's fee level or performance record; no exemption is stated in the facts. The statement that reasonable fees make the purchase permitted is wrong because the prudent-man standard does not authorize a transaction ERISA categorically prohibits. The statement that written disclosure cures the conflict is wrong because disclosure is not an exemption for this self-dealing prohibition. The statement that a separate commission is required is wrong because the manager's interest in the affiliate's management fees is itself the prohibited benefit.
- Which of the following statements regarding an investment policy statement (IPS) for an ERISA plan is true?
Answer: An investment policy statement is not required by ERISA, but a carefully designed statement can help show that a plan fiduciary made investment decisions with the required care, skill, and prudence.
ERISA § 404(a)(1)(B) imposes the prudent-person standard on plan fiduciaries, but ERISA does not require a written investment policy statement. The correct statement is that an IPS is not required but can help demonstrate that investment decisions were made with the required care, skill, and prudence: an IPS documents objectives, asset-allocation guidelines, and monitoring procedures and is recognized as evidence of a prudent process. The statement that ERISA requires a plan fiduciary to adopt and annually review an IPS and to list every permitted security is wrong: no such requirement exists. The statement that failure to follow an IPS is a prohibited transaction is wrong: such a failure would be evaluated under the prudence and plan-document standards, not under the prohibited-transaction rules of ERISA § 406. The statement that an IPS can relieve the named fiduciary of responsibility for monitoring the plan's investment options is wrong: an IPS is a tool for discharging the prudence duty, not a waiver or delegation of fiduciary responsibility.
A state-registered investment adviser representative (IAR) is engaged by the sponsor of a manufacturing company's 401(k) plan. Under the engagement letter, the IAR will recommend a fund menu and model allocations at quarterly meetings with the plan's investment committee. The letter states that the committee retains final authority over all investment decisions. The IAR receives a flat annual fee of $40,000, and the committee has implemented the IAR's recommendations without change for the past three years.
Under ERISA, which statement best describes the IAR's status? Answer: The IAR is a fiduciary because the advice is individualized, given regularly for a fee, and relied on as a primary basis for plan investment decisions.
ERISA § 3(21)(A) makes a person a fiduciary to the extent the person renders investment advice for a fee with respect to plan assets. Under the Department of Labor's five-part test, advice is fiduciary advice when it is individualized, given on a regular basis, and provided pursuant to a mutual understanding that it will serve as a primary basis for investment decisions. The committee's three-year pattern of adopting the IAR's recommendations establishes that understanding; the engagement letter's reservation of final authority does not defeat fiduciary status because the advice is in fact the primary basis for the decisions. The statement that the letter makes the IAR a mere consultant is wrong because a mutual understanding can be inferred from the parties' conduct. The statement that discretionary trading authority is required is wrong because rendering advice for a fee is an independent basis for fiduciary status. The statement about state registration is wrong because ERISA fiduciary status does not depend on registration with any securities regulator or the Department of Labor.
A 401(k) plan satisfies ERISA section 404(c), and participants may choose among fifteen funds and direct their own accounts. A named fiduciary of the plan selected the investment menu ten years ago and has not reviewed it since. One of the funds charges a 1.90% annual expense ratio, the highest on the platform, and has underperformed its benchmark in eight of the last ten years. Several participants, acting on their own, directed 100% of their account balances into that fund and suffered losses, and they now sue the named fiduciary.
Under ERISA, which statement about the participants' lawsuit is correct? Answer: The ten-year failure to review the menu breaches the duty of prudence, and section 404(c) does not excuse that breach.
ERISA § 404(c) and Department of Labor Regulation § 2550.404c-1; Tibble v. Edison International, 575 U.S. 523 (2015). Section 404(c) relieves a fiduciary of liability only for losses that result from a participant's exercise of control over an individual account; it does not relieve the fiduciary of the duty to prudently select and monitor the plan's investment menu. The named fiduciary's ten-year failure to review the menu is an independent breach of the duty of prudence, so the safe harbor does not bar the suit. The statement that the participants' exercise of control is dispositive ignores that the monitoring failure is a separate breach by the fiduciary. The claim that ERISA imposes no continuing duty after an initial prudent selection is contradicted by Tibble. A listing in the plan's investment policy statement cannot override the statutory duty of prudence.
- Which of the following statements regarding fiduciary status under ERISA is true?
Answer: A consultant whose only role is to recommend specific funds for a plan's investment menu is a fiduciary only when the advice is individualized, given on a regular basis for compensation, and mutually understood to be a primary basis for the plan's investment decisions.
ERISA § 3(21)(A) defines a fiduciary as a person who exercises discretionary authority or control over plan management or plan assets, renders investment advice for compensation, or has discretionary authority over plan administration. The statement that a consultant whose only role is to recommend specific funds is a fiduciary only when the advice is individualized, given on a regular basis for compensation, and mutually understood to be a primary basis for the plan's investment decisions reflects the DOL's five-part investment-advice test (DOL Regulation § 2510.3-21). The statement that an attorney becomes a fiduciary whenever the legal fee is paid from the plan trust is wrong: the source of payment does not create fiduciary status, and performing legal services alone does not. The statement that a person with discretionary authority to select and monitor the plan's investment options is not a fiduciary unless the person also has custody of or legal title to the plan's assets is wrong: discretionary authority over the plan's investments is itself a fiduciary function, and custody is not required. The statement that a custodian bank is a fiduciary because custody is a fiduciary function is wrong: a custodian that executes transactions only at the investment manager's direction performs ministerial functions and is not a fiduciary.
An investment adviser is named as an ERISA fiduciary with discretionary authority over a company's defined-benefit plan assets. The adviser directs the plan's securities trades to a particular broker-dealer, and the broker-dealer pays the adviser's firm a cash rebate equal to 10% of every commission the plan generates, in exchange for the adviser continuing to direct the plan's order flow. The plan document and the advisory contract expressly authorize the adviser to accept such payments, and the adviser fully discloses the arrangement to the company's CFO, who approves it in writing. The commission rates are the same institutional rates the broker-dealer charges its other clients.
Under ERISA, which statement about the rebate arrangement is correct? Answer: The arrangement is prohibited because the adviser is receiving consideration from a broker-dealer dealing with the plan in a transaction involving plan assets.
ERISA § 406(b)(1) and (b)(3). A fiduciary may not deal with plan assets in its own interest or receive any consideration for its own account from a party dealing with the plan in connection with a transaction involving plan assets. The adviser is a fiduciary, the broker-dealer executing the plan's trades is a party dealing with the plan, and the 10% cash rebate is consideration flowing back to the adviser's firm, so the arrangement is a per se prohibited transaction. Written approval by the plan sponsor and language in the plan document or advisory contract cannot cure the violation, because no statutory or class exemption permits third-party kickbacks to a fiduciary. The customary-commission-rate argument misses that the violation is the rebate itself, not the level of commissions. The view that the arrangement is prohibited only if the plan paid more than it otherwise would have is also wrong, because section 406(b) is a per se prohibition that does not turn on whether the price was fair.
The sponsor of an ERISA-covered 401(k) plan wants to reduce fiduciary exposure when newly eligible participants fail to make an investment election. The plan's adviser proposes defaulting these participants into an investment option selected by the sponsor.
Which investment option may be designated as the plan's qualified default investment alternative (QDIA) under ERISA? Answer: A diversified target-date fund managed by a registered investment adviser, with advance notice to participants and a quarterly transfer right without penalty.
ERISA § 404(c)(5) and the Department of Labor QDIA regulation, 29 CFR 2550.404c-5, give fiduciaries relief for default investments that meet the regulation's conditions. A QDIA for long-term use must be a target-date or lifecycle fund, a balanced fund, or a managed account, managed by an investment manager (such as an investment adviser registered under the Investment Advisers Act) or offered by a registered investment company; the plan must give advance notice, and participants must be able to transfer out at least once in any three-month period without penalty. A diversified target-date fund with those features qualifies. The stable value fund does not fit the newly eligible participants: a stable value product qualifies only as a grandfathered QDIA for contributions made before December 24, 2007, and its guaranteed rate does not make it a long-term QDIA. The money market fund is a capital-preservation product, which may serve as a QDIA only for a participant's first 120 days of participation, so it cannot be the long-term default. The employer stock fund fails because a QDIA generally may not hold employer securities, and the plan document's authorization does not change that.
- Which of the following statements is true regarding a fiduciary's liability for investment losses in an ERISA plan with participant-directed accounts?
Answer: If a plan satisfies the participant-direction rules, the fiduciary is not liable for losses from a participant's own investment directions but remains liable for the prudent selection and monitoring of the alternatives offered.
ERISA § 404(c) and DOL Regulation § 2550.404c-1 relieve a fiduciary of liability for losses that result from a participant's exercise of control over his or her account in a plan that satisfies the regulation's conditions, including at least three diversified alternatives with materially different risk and return characteristics. The statement that the fiduciary is not liable for losses from the participant's own directions but remains liable for the prudent selection and monitoring of the alternatives is correct: the § 404(c) shield covers only losses caused by the participant's own directions, not losses traceable to an imprudently selected or monitored investment lineup. The statement that offering three alternatives relieves the fiduciary of all liability for plan investment losses is wrong because it ignores the continuing selection-and-monitoring duty. The statement that the rules impose no minimum number of alternatives and hinge on quarterly statements and change notices is wrong: at least three diversified alternatives are required. The statement that a participant's signed acknowledgment may relieve liability is wrong: ERISA § 410(a) voids agreements that purport to relieve a fiduciary of liability, and § 404(c) relief depends on the plan's actual compliance, not on a waiver.
A company amends its 401(k) plan to add automatic enrollment. Contributions for participants who make no investment election are deposited into a target-date retirement fund selected as the plan's default investment. The plan satisfies ERISA section 404(c). The plan fiduciaries give every participant a notice describing the default fund, its objectives, and the right to transfer out, at least 30 days before the first contribution is invested, and they send an updated notice annually. The fund is managed by an unaffiliated registered investment adviser, carries no sales charge or surrender fee, and participants may transfer out of it daily. The fiduciaries intend to rely on the ERISA safe harbor for qualified default investment alternatives.
Which additional fact, if true, would defeat the fiduciaries' protection under that safe harbor? Answer: The target-date fund's portfolio includes a dedicated 5% position, acquired directly, in the common stock of the sponsoring employer.
ERISA § 404(c)(5) and the Department of Labor QDIA regulation, 29 CFR 2550.404c-5. A qualified default investment alternative generally may not hold employer securities. The regulation allows employer securities held by a registered investment company or a similar pooled vehicle under its stated objectives, independent of the plan sponsor, but a dedicated 5% position acquired directly in the sponsor's common stock is not such a holding, so it defeats the safe harbor for losses attributable to the default investment. The other listed facts do not disqualify the fund. A glide path that becomes more conservative over time is the defining feature of a permitted lifecycle fund. Quarterly transfers into another target-date fund meet the regulation's minimum of one transfer out of the QDIA, without penalty, in any three-month period, and participants may still transfer out to the plan's other funds daily. A plan committee may select and monitor the QDIA; the safe harbor's management requirement is met because the fund itself is managed by an unaffiliated registered investment adviser rather than by the committee.
The sole trustee of an ERISA-covered profit-sharing plan is also the chief executive officer of the sponsoring company. When the company experiences a cash shortfall, the CEO borrows $50,000 from the plan's cash account, signing a promissory note at 6% interest, which is higher than the rate the plan's money market fund pays. The loan is repaid in full with interest nine months later.
Under ERISA, which statement best describes the loan? Answer: The loan is a prohibited transaction because it is a lending of money between the plan and a party in interest, regardless of the favorable rate or repayment.
ERISA § 406(a)(1)(B) prohibits a direct or indirect lending of money between a plan and a party in interest. The CEO is a party in interest as both an officer of the sponsoring employer and a fiduciary of the plan, so the loan is prohibited without regard to the interest rate, the plan's realized return, or the fact of repayment. The statement that repayment with a favorable rate makes the loan permitted is wrong because a prohibited transaction is identified by the parties and the transaction, not by the plan's actual experience. The statement that participant loans are unrestricted is wrong because ERISA's participant-loan exemption requires loans to be made available to all participants on a reasonably equivalent basis, at a reasonable rate of interest, and adequately secured. The statement that the CEO is not a fiduciary is wrong because a trustee exercises discretionary authority over plan assets and is a fiduciary regardless of whether the person is the named fiduciary.
- Which of the following statements regarding prohibited transactions under ERISA is true?
Answer: A transaction between a plan and a party in interest, such as a sale of property or a loan of money, is prohibited without regard to whether the terms are fair to the plan.
ERISA § 406(a) makes sales, exchanges, leases, loans, and similar transactions between a plan and a party in interest prohibited per se, and § 406(b) bars fiduciaries from self-dealing, acting for adverse parties, and receiving third-party consideration in plan transactions. These provisions contain no general fairness defense, so the statement that a sale or loan with a party in interest is prohibited regardless of fair terms is correct. The statement that a plan may lend to the sponsoring employer when the loan is secured and bears a reasonable rate is wrong: the statutory exemption in § 408(b)(1) is limited to loans to participants and beneficiaries; loans to the employer are prohibited. The statement that a fiduciary's sale of her own securities to the plan is prohibited only when the plan overpays is wrong: § 406(b)(1) prohibits a fiduciary from dealing with plan assets in her own interest regardless of price. The statement that written disclosure of a third-party fee makes it permissible is wrong: § 406(b)(3) prohibits a fiduciary's receipt of consideration from a party dealing with the plan, and disclosure alone does not cure the violation.
A fiduciary of an ERISA-covered plan enters into a prohibited transaction in which the amount involved is $100,000. The transaction is discovered, and the fiduciary unwinds it and restores the plan to the position it would have occupied. This correction occurs within the same taxable year as the transaction, before the IRS has mailed a deficiency notice or assessed the tax. Under the Internal Revenue Code, the first-tier excise tax on a prohibited transaction is 15% of the amount involved, and a second-tier tax of 100% applies if the transaction is not corrected within the taxable period.
Which statement about the excise tax is correct? Answer: The fiduciary owes $15,000, because correction avoids the 100% second-tier tax but does not eliminate the 15% first-tier tax.
IRC § 4975(a) imposes a 15% first-tier excise tax for each year (or part of a year) in the taxable period; because the correction occurred in the same taxable year as the transaction, the first-tier tax is 15% of the $100,000 amount involved. IRC § 4975(b) imposes the 100% second-tier tax only if the transaction is not corrected within the taxable period. Since the correction occurred before the IRS mailed a deficiency notice or assessed the tax, the second-tier tax is avoided, but the first-tier tax remains due, so the fiduciary owes $15,000. The statement that the 100% tax applies automatically is wrong because the second-tier tax applies only when correction is not timely. The statement that correction eliminates all tax is wrong because timely correction avoids only the second-tier tax. The statement that the tax is reduced to $7,500 is wrong because no such reduction exists.
- Which of the following statements regarding a qualified default investment alternative (QDIA) under ERISA is true?
Answer: A QDIA may be a target-date fund, a balanced fund, or a professionally managed account; money market and stable value funds are permitted only as temporary defaults.
ERISA § 404(c)(5) and DOL Regulation § 2550.404c-5 govern QDIAs. A QDIA may be a target-date or lifecycle fund, a balanced fund, or a professionally managed account. Money market, stable value, and other capital preservation products may serve only as a temporary default; they are not long-term QDIAs. The statement that any default option qualifies if disclosed is wrong: the QDIA rules impose eligibility requirements, and disclosure does not make a capital preservation product a permanent QDIA. The statement that the fiduciary has no further duty to monitor is wrong: the QDIA safe harbor does not relieve the fiduciary of the duty to prudently select and monitor the default investment. The statement that participants may transfer out only once each plan year is wrong: the regulation requires an opportunity to transfer out no less frequently than once within any three-month period.
- Which of the following statements regarding a plan fiduciary's duties under ERISA is true?
Answer: ERISA's prudence requirement is judged by the fiduciary's process rather than by investment outcomes, and the fiduciary must diversify plan assets to avoid large losses unless clearly prudent not to do so.
ERISA § 404(a)(1)(B) requires a fiduciary to act with the care, skill, prudence, and diligence of a prudent person, and § 404(a)(1)(C) requires the fiduciary to diversify plan investments to minimize the risk of large losses unless clearly prudent not to do so. The statement that prudence is judged by process rather than outcomes, and that diversification is required unless clearly prudent not to depart from it, is correct. The statement that following the plan's written investment policy satisfies prudence is wrong: the fiduciary must still investigate and monitor the risks of investments. The statement that a named fiduciary remains personally liable for every loss caused by an investment manager is wrong: ERISA permits delegation of investment management, and a fiduciary who prudently selects and monitors the manager is not liable for the manager's acts or omissions. The statement that a plan document directing employer-stock investment satisfies prudence is wrong: ERISA § 404(a)(1)(D) requires compliance with plan documents only insofar as they are consistent with ERISA, and plan provisions cannot override the prudence and exclusive-benefit duties.
