ERISA vs. the Prudent Investor Rule: Key Differences

Overview of ERISA and the Prudent Investor Rule

ERISA and the Prudent Investor Rule are pieces of legislation enacted to further and protect the interests of investors and beneficiaries. ERISA generally focuses on the interests of employees who benefit from pension, medical, and other employer-sponsored plans. The main concern under ERISA is the ultimate outcome of the investment. The Prudent Investor Rule has a more general focus on all investors. The focus of trustees under this rule is the continual management of the portfolio according to the diverse requirements of the investor, considered in terms of the investor's end goals, and aimed at maximizing the ultimate outcome.

Both ERISA and the Prudent Investor Rule are focused on providing investors with the safety and security of knowing that their investments are managed by knowledgeable experts who have their best interests at heart. Indeed, the fundamental requirement of this legislation is that trustees and fiduciaries be sufficiently experienced and educated to manage their clients' portfolios for the ultimate benefit of the client.

According to the United States Department of Labor, the Employee Retirement Income Security Act of 1974 generally applies to private-industry pension and health plans that are established voluntarily. The Act sets minimum standards to protect individuals who participate in such plans. There are several requirements for administrators, managers, and controllers of these plans in order to fulfill the Act's intention.

Some of these requirements include: plan information to be provided to participants; fiduciary responsibilities for managers and controllers of the plans; a grievance and appeals process to facilitate the obtaining of benefits; and participants' right to sue for benefits or in cases of fiduciary duty breaches.

The U.S. Department of Labor also notes that there have been some amendments to the legislation to expand the benefits that participants might expect from their plans. These include the Consolidated Omnibus Budget Reconciliation Act (COBRA), providing some participants and their families with continued health coverage after events such as job loss; the Health Insurance Portability and Accountability Act (HIPAA), providing protection for participants with pre-existing medical conditions; the Newborns' and Mothers' Health Protection Act; the Mental Health Parity Act; and the Women's Health and Cancer Rights Act. Because the Act applies to private entities, it does not cover health plans operated by groups affiliated with the government or churches, or plans that concern only workers' compensation, unemployment, or disability.

Key Differences in Scope and Standards of Conduct

Whereas ERISA generally concerns only health and pension plans, the New York Prudent Investor Rule appears to apply to a more general investor field. It functions under the Prudent Investor Act and provides rules and regulations governing a trustee who invests and manages property. It also appears to concern the more active investor, generally providing protection against misconduct by trustees. The Prudent Investor Rule was implemented much later than ERISA, being enacted in 1995.

Another significant difference is the basis on which each law operates. Much of ERISA's requirements are focused on outcomes for plan participants. Participants may, for example, expect a certain result when certain events occur. When a participant falls ill or has a certain condition, the plan is adjusted to benefit the participant. Those who participate tend to be passive, while administrators are required to make decisions according to the conditions governing the plans.

The Prudent Investor Rule, on the other hand, is not focused as much on outcomes as it is on the standard of conduct for trustees. While ERISA administrators are indeed required to adhere to a certain standard of conduct, trustees under the Prudent Investor Rule are required to help investors make sound decisions according to the data available at the time of such decisions — hence the word "prudent." Furthermore, the trustee is to engage in this sound decision-making process throughout the duration of the portfolio. This portfolio in turn is governed by a determined set of purposes, terms, and provisions. The rule is therefore governed by the changing circumstances of the market while being unrelated to any change in the conditions of the beneficiary. In other words, one of the main differences between the Prudent Investor Rule and ERISA is that the former concerns the conditions of the changing financial market, while the latter concerns the individual who benefits and his or her particular circumstances.