ERISA diversification of a qualified benefit plan’s funds is one of the major duties required of an ERISA fiduciary. ERISA diversification requirements are intended to mitigate the risk of large losses to a qualified benefit plan. ERISA diversification standards have also been established in order to protect plan participants from securities or investment fraud. ERISA, or the Employee Retirement Income Securities Act, was passed by the federal government in 1974. ERISA created minimum standards for voluntarily established employee benefits and pension plans in private industry.

ERISA places high standards on the conduct of any party who acts as a fiduciary in the establishment, administration, and maintenance of an ERISA qualified benefit plan. A fiduciary is required to conduct all affairs related to these plans with the utmost integrity, honesty, and good faith. If a fiduciary fails to act, or acts in any way that breeches his/her fiduciary duties, that party can be held personally liable for any damages that result.

There are four main fiduciary duties that are required of anyone involved in handling ERISA qualified benefits and pension plans. First and foremost, a fiduciary must always act in the best interest of the plan beneficiary with the skill and care of a prudent person. A fiduciary must act in accordance with all documents and instruments that govern the plan. S/he must also operate for the exclusive purpose of providing benefits to the plan beneficiary. In order to facilitate a fiduciary relationship, there exists an ERISA diversification requirement.

The ERISA diversification requirement mandates that a fiduciary diversify a plan’s assets in order to minimize the risk of large losses to the plan, in accordance with the prudence principal. A fiduciary must take into account a number of factors in order to adequately meet ERISA diversification standards. These factors can include the purpose of the benefit plan, the type of investments that are, or could, be utilized, the amount of assets involved in the plan, geographic dispersion, dates of maturity, and the conditions of the financial and other industries.

ERISA diversification standards are outlined in Section 404(c) of the ERISA Act. There are twenty five different ERISA compliance provisions contained within this section that define fiduciary responsibilities, including ERISA diversification. In the wake of national scandals, such as the Enron case and others, ERISA diversification is becoming an even more important consideration for fiduciaries involved in ERISA benefit plan transactions.

If a fiduciary fails to meet the ERISA diversification standards, they face personal liability for any damages that result. Civil legal penalties can be imposed on fiduciaries in a lawsuit for violation of Section 404’s ERISA diversification requirements. In some cases, a fiduciary can be removed from his professional post if s/he is found in breech of ERISA diversification standards.