Bridgebay Financial, Inc.
Bridgebay does not provide legal advice and recommends that you consult an ERISA attorney concerning settlor and fiduciary roles. The commentary in this communication is strictly an update on plan sponsor trends and does not constitute legal advice.
The Employee Retirement Income Security Act of 1974 (ERISA) establishes legal and operational guidelines for pension and employee benefit plans. Not all decisions directly involving a plan, even when made by a fiduciary, are subject to ERISA’s fiduciary rules. These decisions are business judgment type decisions and are commonly called “settlor” functions.
In response to recent retirement plan litigation, many legal experts are advising plan sponsors to compartmentalize fiduciary risk. They advocate a clear separation between settlor and fiduciary functions and suggest that plan sponsors maintain separate committees.
The “business decision” exception to ERISA’s fiduciary rules indicates that a plan sponsor and retirement plan administrator, may not be considered as a fiduciary when creating, amending or terminating a plan, which are settlor functions.
Among the decisions which would be considered settlor functions are:
- Selecting the type of plan (DB, DC, Roth, etc,)
- Amending a plan, including changing or eliminating plan features
- Changing the level of employee contributions
- Terminating a plan, or part of a plan, including terminating or amending as part of a bankruptcy process.
A plan sponsor is free to amend or terminate its plan at any time as long as they follow regulations on communicating certain types of changes to participants prior to the effective date.
Typical settlor functions involve creation, termination and amendment of a plan, plan design, determination of eligibility, and the benefits offered. Many legal experts believe that settlor functions are not subject to the same ERISA fiduciary standards. For example, the decision to terminate a plan is a settlor function and would not give rise to a claim for breach of fiduciary duty.
Fiduciaries exercise control over plan assets and have discretionary authority over the operation of the plan. Fiduciary actions are governed by ERISA standards, while settlor activities are generally not. Fiduciary status is acquired and is limited to having or exercising discretion over the plan.
This means that the decision to terminate a plan may not be considered a fiduciary action, but the way in which the plan termination is administered would be. This is a major issue for employers that are terminating their defined benefit plans and replacing them with defined contribution plans. This action is an example of a settlor function.
From a legal perspective, the segregation of duties is appealing, yet the ability to maintain distinctly separate settlor and fiduciary functions may be difficult. Often plan sponsor decisions may be a combination of both settlor and fiduciary functions. When acting as both a fiduciary and a settlor, those actions will be closely scrutinized if they are legally challenged.
A corporate official who has dual roles is bound by ERISA’s fiduciary roles only when managing the plan or its investments, but not when performing settlor functions or when conducting general corporate functions.
This communication is strictly an update on plan sponsor trends and does not constitute legal advice from Bridgebay.