Research Proposal on "Employees Retirement Income Security Act of 1974"

Research Proposal 10 pages (3409 words) Sources: 9

[EXCERPT] . . . .

Employees Retirement Income Security Act of 1974 and New York Prudent Investor Rule

ERISA and the Prudent Investor Rule are pieces of legislation enacted to further and protect the interest of investors and beneficiaries. ERISA generally focuses upon the interest of employees who benefit from pension, medical and other employer-sponsored plans. The main concern here is the ultimate outcome of the investment. The Prudent Investor Rule has a more general focus on all investors. The focus of trustees here is the continual management of the portfolio according to the diverse requirements of the investor. These are considered in terms of the end goals of the investor, and attempts to maximise the ultimate outcome.

Both ERISA and the Prudent Investor Rule are focused upon providing investors with the safety and security of knowing that their investments are managed by knowledgeable experts who have their best interest at heart. Indeed, the fundamental requirement of this legislation is that trustees and fiduciaries be sufficiently experienced and educated to manage their clients' portfolio 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 for individuals who are part of such plans. There are several requirements for both administrators, managers and controllers of these plans in order to fulfill the intention of the Act.

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

. Being that the Act applies to private entities, it does not cover health plans operated by groups affiliated with the government, churches, or plans that concern only workers compensation, unemployment, or disability.

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 that governs 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 also implemented much later than ERISA, being instated only during 1995

Another significant difference is the basis on which the legislation functions. Much of ERISA's requirements are focused upon the outcome for participants in the plan. 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 in order to benefit the participant. Those who participate, in other words, 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 upon 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

. 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 the fact 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.

The trustee under the Prudent Investor Rule would then also take a much more active and continuing role that the one under ERISA. A further element of the former is then also a consideration of the risk and return objectives as determined by the portfolio of the investor. Elements that should be considered in this regard include: the size of the portfolio; the fiduciary relationship; the requirements of the governing instrument; economic conditions such as inflation or deflation; tax trends; the role and outcome of each decision within the purpose of the overall portfolio; the expected return of the portfolio; and the needs of the beneficiaries

Whereas changes within ERISA are related only to changing personal circumstances, changes under the Prudent Investor Rule can be allowed according to predetermined criteria such as financial conditions or market values. Hence a greater amount of freedom is allowed to trustees under the Rule than those under ERISA. The Prudent Investor Rule also recognizes that there is no determined set of conditions considered to be inherently prudent. Indeed, the determination of such prudence is dependent upon the good judgment of the trustee. The Rule requires this trustee to be able to determine the best conditions for investment, diversification, and disposal of assets. As such, the trustee is required to have specific investment skills, and to use these for the optimal benefit of the beneficiary. These skills are also to be applied to the adjustment of the investment to provide optimal benefits.

In addition to positive requirements for trustees under the Prudent Investor Rule, there are also some prohibitions. An adjustment cannot for example be made when it diminishes income interest; changes the payable amount in a fixed annuity; or an amount payable to a charity.

Special investment skills under the Prudent Investor Rule also receives considerably more attention than those under ERISA. The Rule requires trustees to have special investment skills that will serve the beneficiary best. In other words, the trustee enjoys trust from the beneficiary in order to obtain the best possible return on investment. Such skills are not specifically required for ERISA. Under ERISA, protection of the end result is the main important factor for beneficiaries, while the Prudent Investor Rule implies a considerable amount of risk during the investment term itself.

The Prudent Investor Rule includes the possibility of delegation. An investment manager can delegate the management functions to others, with consideration of certain precautionary measures. These include: ensuring the suitability of the person to the functions being delegated; the scope and terms of delegation; a review of compliance during the period of delegation; and the role of the delegation in controlling overall costs. The person to whom the functions are delegated accepts responsibility for managing such functions to the best of his or her ability.

Although delegation does not appear to be included in ERISA, its standards of care can be compared in this regard. The Exclusive Purpose Rule requires fiduciaries to act in the interest of participants and beneficiaries, while administrative costs are defrayed. The Prudent Man Rule compares with the Prudent Investor rule by requiring that fiduciaries should exercise care, skill, prudence and diligence in investing the funds according to the financial conditions of the time, as well as the end goal of the investment. The Diversification Rule requires that risk should be minimizes where at all possible, by means of diversifying the investment. Finally, the Acting in Accordance with Plan Documents Rule subjects fiduciaries to the documents and instruments that govern the plan according to the provisions of ERISA.

Diversification of investments is also required by the Prudent Investor Rule. Unless the investment is served better by not doing so, diversification should form part of the investment process. Loyalty as required by the rule also compares to serving the interest of beneficiaries under ERISA. Loyalty entails that trustees should remain loyal to the requirements of the investors they serve.

Investments governed by the Prudent Investor Rule are somewhat more complicated and volatile than those governed by ERISA, precisely because they are subject to circumstances at any given time. A trustee should therefore pay considerable attention to a variety of factors in order to ensure that the investment remains sound, as seen above. Indeed, the role here is to ensure that not only the long-term goals, but the short-term goals are also met.

Under the Prudent Investor Rule, two requirements include the Initial Asset Review and Impartiality. The former entails that the trust assets should be reviewed within a certain time after being accepted for investment. The latter means that a trustee should remain impartial when investing the funds, taking as sole guidance the interests of beneficiaries.

Under the Prudent Investor Rule, investors are protected by the Fiduciary Oversight requirement. An Investment Advisory Council is to review all investments a fiduciary makes, and to recommend suitable policies and changes to existing investments. This protects both the investor and the state. There is no similar provision… READ MORE

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