Life & Health Insurance Exam (National Portion)Federal RegulationsMedium
A company is setting up a new 401(k) plan for its employees. The HR department is reviewing the Employee Retirement Income Security Act (ERISA) to ensure compliance. Under ERISA, what is the primary purpose of the 'fiduciary duty' requirement for individuals managing employee benefit plans?
- ATo allow the employer full discretion in managing plan assets without oversight.
- BTo guarantee a specific rate of return on all plan investments.
- CTo prioritize the interests of plan participants and beneficiaries above all others.
- DTo ensure that all employees contribute equally to the plan.
Show answer & explanationAnswer & explanation
Correct answer: C. To prioritize the interests of plan participants and beneficiaries above all others.
Under ERISA, fiduciaries managing employee benefit plans, such as a 401(k), have a legal obligation to act solely in the best interests of the plan participants and their beneficiaries. This is known as fiduciary duty and is a cornerstone of ERISA protection.
Why the other options are wrong
- A. ERISA imposes strict oversight and duties on employers and plan administrators, preventing full discretion.
- B. Fiduciaries must act prudently, but they cannot guarantee specific investment returns.
- D. Equal contributions are not a primary focus of fiduciary duty under ERISA, which is about asset management and beneficiary interests.
ERISA Fiduciary Duty
ERISA mandates that individuals managing employee benefit plans act as fiduciaries, meaning they must act solely in the best interests of plan participants and beneficiaries.
- Highest standard of care.
- Acts solely for participants' benefit.
- Requires prudence and diversification of investments.
Memory trick: ERISA ensures plan managers are 'RIGHT' for participants.