Module 10 Fiduciary Responsibilities and Investments

Vocabulary flashcards covering ERISA fiduciary standards, prohibited transactions, prudent investing rules under UPIA, and DOL guidance on cryptocurrency in 401(k) plans.

Solitary focus on interests of participants and beneficiaries

The requirement under ERISA that fiduciaries must fulfill their function with this primary focus, using checklists to avoid conflicts of interest and delineate rationales for decisions.

Fiduciary

Anyone who exercises discretionary authority or control over the administration or management of a plan, manages plan assets, or renders investment advice for compensation.

Fiduciary responsibilities

The duty to act solely in the interest of participants; to act with the care, skill, prudence, and diligence of a prudent person; to diversify investments; and to follow the terms of the plan and ERISA.

Disqualified person

Includes any plan fiduciary, service provider, employer with employees in the plan, owner of $50\%$ or more of the plan sponsor, or any officer, director, HCE, or $10\%$ owner.

Prohibited transactions

Actions between a plan and a disqualified person/party in interest, such as property sales, lending money, furnishing goods and services, or the transfer and use of plan assets.

Penalties for fiduciary breaches

An excise tax of $15\%$ on the prohibited transaction.

Co-fiduciary liability

The liability a fiduciary may face for another's violations if they knowingly participate in, conceal, have knowledge of, or cause the violation through their own actions.

Earmarked investments

A plan arrangement where employees are permitted to direct the investments of their own individual accounts.

Section $404(c)$ rules

Statutory rules that provide relief from fiduciary liability in the context of earmarked investments.

Investment education

General financial and investment information provided to participants that does not expose sponsors to fiduciary liability.

Investment advice

Specific recommendations for investment decisions which are subject to fiduciary responsibility.

Types of investment-related information considered investment education

General plan provisions, general financial and investment information, asset allocation models, and interactive investment material.

"Reasonable" fees

Expenses for which fiduciaries are responsible for "defraying reasonable expenses of administering the plan" under ERISA.

Procedural prudence

A component of ERISA's prudent requirement that focuses on the investigation, evaluation, and decision-making process.

Substantive prudence

A component of ERISA's prudent requirement regarding the duty to evaluate relevant information and make an informed decision based on that information.

Elimination of non-systematic risk

The objective addressed by ERISA's mandate for the diversification of investments.

Investment Policy Statement

A guideline, though not required, that is generally recommended for investment fiduciaries to facilitate the proper monitoring of investments.

Restatement (Third) of Trusts

A document that provides investment practitioners with guidance on acceptable investment management practices.

Prudent investor rule

A rule that eliminated restrictions on allowable investment types, allowing fiduciaries to consider a variety of options including hedge funds.

Uniform Prudent Investor Act (UPIA)

An act stating a trustee can invest in anything that meeting the risk/return objectives of the trust and satisfies other prudent investing requirements.

Individual asset evaluation under UPIA

The requirement that management decisions for individual assets must be evaluated in the context of the trust portfolio as a whole, rather than in isolation.

Compliance Assistance Release No. $2022-01$ (CAR-$2022-01$)

DOL guidance stating 401(k) fiduciaries must exercise extreme caution, weigh pros and cons, and document decision-making when offering cryptocurrency options.

DOL reasons for cryptocurrency caution

Speculative and volatile nature, custody and recordkeeping concerns, participant challenges in making informed decisions, valuation concerns, and rapidly changing legislation.

DOL investigative program

A program announced in CAR-$2022-01$ intended to ensure fiduciaries offering cryptocurrency options are complying with ERISA.