What fiduciary duties does ERISA impose on pension plan investment managers, and how do violations get enforced?

ERISA (Employee Retirement Income Security Act of 1974) imposes stringent fiduciary duties on anyone who exercises discretionary authority over a retirement plan's assets or provides investment advice for compensation. These duties are personal and cannot be waived by the plan or its participants.\n\nERISA's Core Fiduciary Duties:\n\n1. Duty of Loyalty (Exclusive Benefit Rule): Act solely in the interest of plan participants and beneficiaries for the exclusive purpose of providing benefits and defraying reasonable plan expenses.\n\n2. Duty of Prudence (Prudent Expert Standard): Act with the care, skill, prudence, and diligence that a prudent person familiar with such matters would use --- this is a higher standard than the general prudent person rule.\n\n3. Duty to Diversify: Diversify plan investments to minimize the risk of large losses, unless clearly prudent not to do so.\n\n4. Duty to Follow Plan Documents: Administer the plan in accordance with its governing documents (to the extent consistent with ERISA).\n\n`mermaid\ngraph TD\n A[\"ERISA Fiduciary
Duties\"] --> B[\"Loyalty
Exclusive benefit
No self-dealing\"]\n A --> C[\"Prudence
Expert standard
Process-based\"]\n A --> D[\"Diversification
Minimize large losses
Default requirement\"]\n A --> E[\"Plan Compliance
Follow documents
Unless ERISA conflict\"]\n B --> F[\"Prohibited:
Using plan assets
for own benefit\"]\n C --> G[\"Must document
investment process
and rationale\"]\n`\n\nWho Is an ERISA Fiduciary?\n\nERISA uses a functional test --- anyone who exercises discretionary authority or control over plan management or assets, or provides investment advice for direct or indirect compensation, is a fiduciary. This includes:\n- Plan trustees\n- Investment managers (registered under the Investment Advisers Act)\n- Investment consultants who provide specific recommendations\n- Named fiduciaries in the plan document\n\nWorked Example:\n\nRidgemont Capital is hired as the investment manager for Broadfield Corp's $320M defined benefit pension plan.\n\nA junior analyst at Ridgemont recommends allocating 15% to a new private equity fund managed by Ridgemont's affiliate. Issues:\n\n1. Loyalty violation: Directing plan assets to an affiliate creates a prohibited transaction under ERISA Section 406(b) unless a specific exemption applies.\n2. Prudence concern: The decision must be documented with independent due diligence, benchmarking, and fee comparison. A rubber-stamp approval is insufficient.\n3. Process documentation: Ridgemont must demonstrate that a prudent expert would have selected this fund even without the affiliate relationship.\n\nEnforcement and Penalties:\n- Personal liability: Fiduciaries must restore any losses caused by their breach\n- Disgorgement: Any profits earned through breach must be returned to the plan\n- Civil penalties: Up to 20% of the recovery amount\n- Excise taxes: 15% tax on prohibited transactions, escalating to 100% if not corrected\n- DOL enforcement: The Department of Labor can bring actions against individual fiduciaries\n- Criminal penalties: Willful violations can result in fines up to $100,000 and imprisonment\n\nKey Exam Points:\n- ERISA preempts state fiduciary law for covered plans\n- The prudent expert standard is process-based --- the outcome does not determine breach; the process does\n- Co-fiduciaries have a duty to monitor each other\n- Fiduciary status is determined by function, not title\n\nReview ERISA compliance in our CFA Ethics course.