Investment
Consultant
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.
