Both ERISA and the Prudent Investor Rule prohibit certain types of transactions. According to Laura Jordan6, the U.S. labor secretary has the power to grand exemptions from prohibitive rules under ERISA. When such exemption is not granted and fiduciaries engage in prohibitive activities regardless, the result could be liability to repay losses, return profits, and IRS penalty taxes.
ERISA includes considerably more prohibitive rules than the Prudent Investor Rule. Some of these include a prohibition from engaging in transactions that are a direct sale of property between the plan and interested party; a loan or credit extension; furnishing of goods, services or facilities; or a transfer to a party of interest that will result in benefit to such a party. Among others, further prohibitions include any form of self-interest in the actions of fiduciaries when handling assets. Exemptions are granted under condition of certain loans to participants and beneficiaries, and specific and reasonable arrangements with parties of interest. The latter is subject to the condition of promoting the operation of the specific plan in question. Being more numerous, prohibitions under ERISA are considerably more complicated than those for the Prudent Investor Rule.
For the Prudent Investor Rule, limitations include the Common Stock Limitation. This limitation prohibits trustees from investing more than 55% of the trust's value in common stock. Being subject to state law, the funds are also not to be invested in forms of business that could be considered against the national interests of the United States. Specifically, investment in Iran is limited. Similarly, investment in Northern Ireland is prohibited if investment corporations have not adopted the MacBride principals
. Other prohibitions include investments in state obligations and securities. In terms of securities, Jordan notes that securities are only allowed as part of the investment when they are on a list of primary dealers as published by the Federal Reserve Bank of New York.
While the Prudent Investor Rule includes an impressive number of authorized transactions, there is no similar provision for ERISA. The Rule for example allows investments in real estate investment trusts (REITs), real estate mortgages, bonds and stocks, mortgage pass-through certificates, loans to mortgage lenders, and several others. In contrast to ERISA, these rules are numerous and specific, once again adhering to the requirement of maintaining the short-term goals of the investor while also maintaining consideration of the ultimate benefit.
The prohibition on loans has been mentioned above; there are some very specific requirements for both ERISA and the Prudent Investor Rule. While ERISA does provide for loans in certain circumstances, these are subject to a variety of restrictions. Extending loans is also subject to the discretion of the fiduciary, where the ultimate benefit and interest of beneficiaries should be taken into account at all times. Loans that violate ERISA's rules cannot be accepted. Transactions that are prohibited in this regard include guaranteeing a loan; acquiring debt instrument; and funding a plan with employer contributions. While there is no formal limitation on the percentage of investment in loans, Jordan notes that there is a 25% cap on the total value of a plan that can be invested in this way. Factors that influence the validity of a loan investment include self-dealing by a fiduciary, the amount of plan assets used in this way, creditworthiness, interest rate, and other factors. Exemptions from prohibited loan transactions are provided when the beneficiary plan is an employee stock ownership plan (ESOP).
Under the Prudent Investor Rule, trustees are allowed to make loans to mortgage lenders, as subjected to certain conditions
. Loans may for example be received on behalf of the state when the governor approves it.
ERISA has very specific and broad prohibitions concerning transactions that provide goods, services, or facilities. An example of such a prohibition is the provision of personal living quarters to a party in interest. These prohibitions also include office space, equipment, and supplies. When there is a requirement to meet plan operational needs, exemptions may be granted. The Prudent Investor Rule does not include a similar prohibition.
ERISA takes quite serious consideration of a breach of fiduciary duties. According to Jordan, ERISA fiduciaries who fail to meet the Act's requirements can for example be held personally liable for such failure. This also applies to co-fiduciaries. If a fiduciary breaches his or her responsibilities, obligations or duties as required by ERISA are held personally liable. Traditional trust law can also imply liability. When fiduciaries engage in prohibited transactions, they could be subjected to excise taxes. Fiduciaries are also required to remedy breaches committed by their predecessors. There are no specific provisions that govern such breaches under the Prudent Investor Rule.
Record keeping and reporting are important functions under both ERISA and the Prudent Investor Rule. Under ERISA, employers who maintain any compensation or other beneficiary...
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