Series 65

AAA

Retirement Plans - ERISA Issues


The Employee Retirement Income Security Act (ERISA) was enacted in 1974 to protect the rights of employees under retirement plans offered by their employers.

In addition to safeguarding retirement funds from employer mismanagement, ERISA requirements also cover the following:

  • Fiduciary responsibility - the plan's trustee must manage plan assets and make decisions in the best interests of the plan participants. The trustee cannot sell assets to the plan or earn commissions from plan investments. Also, plan assets must be kept separate from company assets. Regarding investment options under ERISA:

    • Fiduciaries for the plan must follow the Prudent Investor standard discussed in the Handling Client Funds section.

    • Sufficient investment options must be available under the plan so that plan participants can create an adequately diversified portfolio.

    • An investment policy statement is recommended to serve as a guideline for investment decisions to be made. The statement may include comments on risk tolerance, investment philosophy, time horizons, asset classes and expectations regarding rates of return.


      Look Out!
      It is essential for an IA to understand investment policy statements. Either the plan participants or the plan trustees may sue an IA who does not follow the guidelines of this statement. The IA could be liable for breach of fiduciary duty, even if the plan assets have outperformed the market.

  • Nondiscrimination - all plan participants must be treated equally under the plan, and highly compensated employees must not benefit to a greater degree than non-highly compensated employees.

  • Vesting - plan benefits may require a vesting period before the employee earns the right to the benefit if he/she leaves the company. ERISA regulations limit the length of such a vesting period to a reasonable schedule.

Not all employer plans are subject to ERISA. For example, governmental retirement plans are exempt from ERISA requirements. IRAs are not subject to ERISA, since an IRA is not considered an employer plan. Also, nonqualified plans, which do not qualify for tax-deductible contributions, are not subject to ERISA.

Nonqualified Retirement Plans
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