Fiduciary duty is a legal requirement of loyalty and care that applies to any person or organization that has a fiduciary relationship with another person or organization. A fiduciary is a person, committee, or organization that has agreed to accept legal ownership or control and management of an asset or group of assets belonging to someone else. Some examples of fiduciary relationships might include an investment manager to participants in a pension plan, a majority stockholder in a corporation to minority investors, the members of a partnership to one another, a banker to customers, an attorney to a client, or even a parent to a child.

A fiduciary duty is one of complete trust and utmost good faith. While fiduciaries take legal title to assets, the assets do not belong to them. Rather, legal title allows fiduciaries to administer and manage the assets for a temporary period and for a specific purpose. In taking control of another's assets, fiduciaries also agree to manage those assets in accordance with the wishes of the individual who established the fiduciary relationship. The powers and duties of fiduciaries are often established in a document that formally establishes the fiduciary relationship. The conduct of fiduciaries is governed by common law as well as by specific federal and state laws. The Uniform Fiduciary Act and the Uniform Trustees' Powers Act serve as models for state legislation.

Fiduciaries owe two main duties to their clients: a duty of loyalty and a duty of care. The duty of loyalty requires that fiduciaries act solely in the interest of their clients, rather than in their own interest. Thus fiduciaries must not derive any direct or indirect profit from their position, and must avoid potential conflicts of interest. The duty of care requires that fiduciaries perform their functions with a high level of competence and thoroughness, in accordance with industry standards.

Corporate directors have a special fiduciary duty to their shareholders. They are accountable not only for the safekeeping of assets but also for their efficient and effective use. Directors may not profit personally at the expense of, or contrary to, the corporation's shareholders. In other words, corporate directors must place the interests of shareholders above their own interests. The concept of fiduciary duty has a wide variety of other applications in the business world. But a particular area of concern for small businesses is the expanded definition of fiduciary duty that applies to employers that offer certain types of benefit plans to their employees.


Employers that offer employee benefit plans—such as 401(k) plans or other types of pension plans—are bound by the definition of fiduciary duty set forth in the Employee Retirement Income Security Act of 1974 (ERISA). ERISA, in regulating employee benefit plans, established higher standards of fiduciary duty for individuals who have control over a plan's assets than had existed for other types of fiduciaries under common law.

In spelling out fiduciary duties with regard to employee benefit plans, ERISA covers the duty of loyalty, the duty to use prudence, and the duty to comply with the plan. The duty of loyalty means that fiduciaries must act in the best interests of the plan and its participants. If fiduciaries are also plan participants, they must subordinate their own interests to those of the plan. In cases where plan participants form a diverse group with different interests, it may be difficult to balance the interests of all concerned.

ERISA expands the concept of care beyond that found in common law. Section 404(a)(1) of ERISA states that a fiduciary shall discharge his duties with respect to a plan "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." Thus, fiduciaries of employee benefit plans must discharge their duties with adequate expertise. The courts have found that fiduciary duties were breached when nonexpert laypersons failed to seek independent qualified counsel when making decisions affecting plan assets. Plan fiduciaries are under an obligation not only to use their special skills and expertise, but also to engage qualified advisers and managers if they lack the expertise themselves.

The prudent person standard, as expressed in ERISA, also requires that fiduciaries "diversify the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so." ERISA also makes note of prohibited transactions. Additional specific duties of plan fiduciaries may be set forth in the plan document, and fiduciaries have a duty to administer the plan "in accordance with the documents and instruments governing the plan." Fiduciary duties outlined in the plan document must be consistent with ERISA.

A much-discussed aspect of ERISA is that it established personal liability for breaches of fiduciary duty. That is, fiduciaries of employee benefit plans can be held personally liable for any breaches of their duties as spelled out in ERISA. ERISA expanded the concept of fiduciary duty to cover named fiduciaries as well as anyone else who has the power to manage, acquire, or dispose of any assets of a plan. Thus, even if they are not named specifically as fiduciaries, small business owners, chief financial officers, controllers, and management accountants can be held to ERISA's standards of fiduciary duty if they have the power to manage, acquire, or dispose of the plan's assets. As a result, small businesses that offer employee pension plans must be careful to manage plan assets in accordance with ERISA.


Hofmann, Mark A. "Fiduciary Liability in Review." Business Insurance. October 9, 1995.

Karol, Bernard. "Fiduciaries Must Beware of Potential Conflicts." American Banker. June 26, 1997.

Rutherford, Elizebeth A. "Fiduciary Liability 101: Do You Pass?" Employee Benefits Journal. March 2000.

Welbourn, Thomas. Fiduciary Liability Insurance: A Necessary Means of Protection." Leaders' Edge. May 1998.

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