Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.
It is important to note that ERISA fiduciary rules are different from the fiduciary rules imposed by state law. Because of federal preemption, state fiduciary rules do not apply to ERISA plans.
Therefore, individuals whose past experience was limited to non-ERISA 403(b) plans will need to understand two significant differences between most states’ fiduciary standards and ERISA fiduciary standards.
- ERISA generally requires fiduciaries to meet a prudent expert standard. That is, fiduciaries will be measured against the specialized skill and experience of experts in the relevant field. Under most state law, fiduciaries are held to a prudent person standard with no expectation of expertise or exceptional skill.
- ERISA imposes a mandatory diversification requirement. This standard requires plans to diversify assets unless it is clearly prudent not to do so. State law generally has no such diversification requirement.
Therefore, in the absence of ERISA, a 403(b) program could offer only fixed annuity contracts. However, because of the diversification requirement, ERISA 403(b) programs
must invest in a broad spectrum of investment vehicles that are selected in a manner that reduces overall risk of large losses.
Generally, these rules would require a person who is acting as a fiduciary to an ERISA plan to qualify as an expert in certain areas. If the person does not have the necessary skills or experience in the relevant areas of expertise, then fiduciaries should be strongly advised to obtain competent help and guidance.