Employees Retirement Income Security Act Research Proposal

Excerpt from Research Proposal :

Participants are also protected by prohibiting employers from deducting costs from their tax liability of not complying with ERISA6.

Both ERISA and the Prudent Investor Rule prohibit certain types of transactions. According to Laura Jordan6, the U.S. labor secretary has the power to grand exemptions from prohibitive rules under ERISA. When such exemption is not granted and fiduciaries engage in prohibitive activities regardless, the result could be liability to repay losses, return profits, and IRS penalty taxes.

ERISA includes considerably more prohibitive rules than the Prudent Investor Rule. Some of these include a prohibition from engaging in transactions that are a direct sale of property between the plan and interested party; a loan or credit extension; furnishing of goods, services or facilities; or a transfer to a party of interest that will result in benefit to such a party. Among others, further prohibitions include any form of self-interest in the actions of fiduciaries when handling assets. Exemptions are granted under condition of certain loans to participants and beneficiaries, and specific and reasonable arrangements with parties of interest. The latter is subject to the condition of promoting the operation of the specific plan in question. Being more numerous, prohibitions under ERISA are considerably more complicated than those for the Prudent Investor Rule.

For the Prudent Investor Rule, limitations include the Common Stock Limitation. This limitation prohibits trustees from investing more than 55% of the trust's value in common stock. Being subject to state law, the funds are also not to be invested in forms of business that could be considered against the national interests of the United States. Specifically, investment in Iran is limited. Similarly, investment in Northern Ireland is prohibited if investment corporations have not adopted the MacBride principals

. Other prohibitions include investments in state obligations and securities. In terms of securities, Jordan notes that securities are only allowed as part of the investment when they are on a list of primary dealers as published by the Federal Reserve Bank of New York.

While the Prudent Investor Rule includes an impressive number of authorized transactions, there is no similar provision for ERISA. The Rule for example allows investments in real estate investment trusts (REITs), real estate mortgages, bonds and stocks, mortgage pass-through certificates, loans to mortgage lenders, and several others. In contrast to ERISA, these rules are numerous and specific, once again adhering to the requirement of maintaining the short-term goals of the investor while also maintaining consideration of the ultimate benefit.

The prohibition on loans has been mentioned above; there are some very specific requirements for both ERISA and the Prudent Investor Rule. While ERISA does provide for loans in certain circumstances, these are subject to a variety of restrictions. Extending loans is also subject to the discretion of the fiduciary, where the ultimate benefit and interest of beneficiaries should be taken into account at all times. Loans that violate ERISA's rules cannot be accepted. Transactions that are prohibited in this regard include guaranteeing a loan; acquiring debt instrument; and funding a plan with employer contributions. While there is no formal limitation on the percentage of investment in loans, Jordan notes that there is a 25% cap on the total value of a plan that can be invested in this way. Factors that influence the validity of a loan investment include self-dealing by a fiduciary, the amount of plan assets used in this way, creditworthiness, interest rate, and other factors. Exemptions from prohibited loan transactions are provided when the beneficiary plan is an employee stock ownership plan (ESOP).

Under the Prudent Investor Rule, trustees are allowed to make loans to mortgage lenders, as subjected to certain conditions

. Loans may for example be received on behalf of the state when the governor approves it.

ERISA has very specific and broad prohibitions concerning transactions that provide goods, services, or facilities. An example of such a prohibition is the provision of personal living quarters to a party in interest. These prohibitions also include office space, equipment, and supplies. When there is a requirement to meet plan operational needs, exemptions may be granted. The Prudent Investor Rule does not include a similar prohibition.

ERISA takes quite serious consideration of a breach of fiduciary duties. According to Jordan, ERISA fiduciaries who fail to meet the Act's requirements can for example be held personally liable for such failure. This also applies to co-fiduciaries. If a fiduciary breaches his or her responsibilities, obligations or duties as required by ERISA are held personally liable. Traditional trust law can also imply liability. When fiduciaries engage in prohibited transactions, they could be subjected to excise taxes. Fiduciaries are also required to remedy breaches committed by their predecessors. There are no specific provisions that govern such breaches under the Prudent Investor Rule.

Record keeping and reporting are important functions under both ERISA and the Prudent Investor Rule. Under ERISA, employers who maintain any compensation or other beneficiary plans should file an annual IRS return. The return should include information about the qualification, financial condition and operations of the plan. In addition, administrators are to maintain records, report plan information both to the government and participants. Further filings include reports, certifications, and descriptions, as well as detailed reports and information for the purpose of verification. Records must be kept of six years after filing. Employers must also keep records on each employee's benefits that are due from the plan.

Specifically, ERISA requires U.S. DOL reporting, to include information such as a plan description; material modification; an annual report; terminal reports; notice of amendments; and any additional information as requested.

Pension Benefit Guaranty Corporation Reporting requires administrators to file reports such as a notice of reportable events; an annual report; notice of termination; notice of withdrawal; notice of inability to pay basic benefits on time; and other documents as requested.

It has been mentioned above that ERISA requires full disclosure of the plan, its benefits an requirements to participants and beneficiaries. According to Jordan, there are three forms of disclosure: automatic disclosure; requested disclosure; and reasonable periodic disclosure. The first and third are automatically provided by administrator. In terms of the second, beneficiaries are allowed to request any additional information to help clarify the plan and its provisions for themselves.

Under the Prudent Investor Rule, the Advisory Board is also required to submit reports to the governor, the General Assembly, and also to beneficiaries on an annual basis. ERISA however appears to include considerably more specific requirements regarding both formal annual filings as well as disclosures to beneficiaries. The Prudent Investor Rule requires annual reports on the fund operation, which includes receipts, disbursements, assets, investments, liabilities, and administrative costs.

According to W. Scott Simon

, one of the crucial duties of an ERISA plan administrator is to select, monitor, and replace the investment options of the plan for the benefit of participants. One problematic element under ERISA, according to Simon, is the fact of potentially high and hidden costs caused by the administration of plan providers. This prohibits the prudent management of such investments, and incurs unnecessary risk. As a remedy, Simon suggests the full implementation of ERISA requirements in terms of the above-mentioned selecting, monitoring and replacement functions.

In addition to the practical manifestation of ERISA and the Prudent Investor Rule, it is also interesting to consider the evolution of the legislation. According to Schanzenbach & Sitkoff

, for example, the new Prudent Investor Rule frees trustees to base investments upon risk and return in favor of safe investments. The authors consider the ability of such investments to adhere to the original "prudence" requirement for which the Rule has been implemented in the first place. Such concerns are also voiced by others authors, such as David Scheangold

and Percy S. Poon

In conclusion, both ERISA and the Prudent Investor Rule appears to be focused upon benefiting investors and participants. Fiduciaries and trustees are required to implement measures to favor the best possible options during any given time, while taking into account the end benefit of the investor. While ERISA appears to generally apply to employees and their benefits, the Prudent Investor Rule is more generally focused upon all investors. Furthermore, ERISA tends to be focused upon the final outcome of the plans in question, while the Prudent Investor Rule focuses more greatly upon the investment term itself. Both legislatures have rules and requirements that specifically focus upon their purpose for the beneficiaries involved.


Aalberts, Robert J. & Poon, Percy S. 2006. Derivatives and the Modern Prudent Investor Rule: Too Risky or Too Necessary? Ohio State Law Journal, Vol 67, No. 3. http://moritzlaw.osu.edu/lawjournal/issues/volume67/number3/aalberts.doc

Jordan, Laura. 1999. Comparison of ERISA and State Pension Protection Provisions. OLR Research Report, Dec. 10. http://www.cga.ct.gov/ps99/rpt/olr/htm/99-r-1131.htm

Poon, Percy S. 1996. The New Prudent Investor Rule and the modern portfolio theory: a new direction for fiduciaries. American Business Law Journal, Sept 22. http://www.allbusiness.com/personal-finance/investing-financial-advisor/582147-1.html

Prudent Investor Act. http://www.nysl.nysed.gov/libdev/excerpts/ept11-23.htm

Robinson, M.…

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