The Source and Creation of ERISA Fiduciary
By Mark Johnson, Ph.D., J.D.
The Employee Retirement Income
Security Act of 1974 (ERISA) is a federal law that establishes legal and
operational guidelines for private pension and employee benefit plans.
The law requires that plan sponsors must provide participants with specific
information about plan features and funding. ERISA also establishes certain
fiduciary responsibilities for those who manage the plan, which is what
will be discussed in this article.
Administrators and fiduciaries
of an ERISA plan have certain legal obligations to employees who participate
in a plan. They must act solely in the interests of participants and beneficiaries,
for the exclusive purpose of furnishing benefits and paying reasonable
plan expenses. Fiduciaries of the plan they must perform their functions
in a prudent and careful manner, diversify any plan investments to minimize
risk, and must comply with any written documents that govern the particular
ERISA requires every plan have
at least one named fiduciary with authority to manage the plan. Plans
also must have a plan administrator and some plans require a trustee.
The rationale is to let plan participants know who is responsible for
operating the plan for their benefit.
In a corporate setting, it is common
for the employer to be the plan sponsor, administrator, fiduciary and
trustee. Naturally, a corporation can operate only through individuals,
but while encouraged by the Department of Labor, (DOL), it is not a requirement
to name individuals as fiduciaries. The only automatic fiduciaries, by
the nature of their positions, are the plan administrator and trustees.
Although there are different models
that corporations and corporate groups use to carry out their ERISA responsibilities
and otherwise govern the plan(s), a common design is for a board of directors
to either create committee(s), or empower the CEO to do so. These committees
may consist of officers of the corporation who are empowered with the
discretionary authority to perform all acts necessary to create amend,
administer, interpret and terminate, as they deem appropriate the company’s
benefit plans. In some instances, the board may require that final approve
for some decisions must come from the board itself.
The committees, whose members are
fiduciaries, will work with appropriate members of the organization and
outside advisors to implement this mandate. Although fiduciaries, committee
members are not always governed by fiduciary rules, even when they make
decisions regarding the plan. For example the decision to amend or terminate
the plan is not a fiduciary act, although the implementation of such decisions
could be. They are also not governed by ERISA’s fiduciary standards
when making corporate decisions, even when those decisions affect plan
participants. Committees will often delegate important functions to other
people within the organization. Depending on the nature of the delegation
order, such delegates may or may not become fiduciaries.
ERISA § 3(21) creates another
category of fiduciaries known as “functional” fiduciaries.
As the name implies, fiduciary status is derived not from a formal designation,
but from the actual duties of the individual. A functional fiduciary is
one who exercises discretional authority or control over a benefit plan;
has discretionary authority or responsibility regarding a benefit plan;
or renders investment advice for a fee, or directs those who do the latter.
The DOL distinguishes between discretionary
(fiduciary) activity and work it deems administrative (or “ministerial”).
The latter activities include:
• Applying rules to determine
eligibility for participation or benefits;
• Calculating service or compensation credit for benefits;
• Preparing employee communications materials;
• Maintaining participant service records;
• Preparing government agency reports;
• Calculating benefits;
• Orienting new participants and advising participants of their
rights and options under the plan;
• Collecting and transmitting contributions as provided in the plan;
• Processing claims; and
• Making recommendations to others for decisions about plan administration.
A person performing these functions
within a framework of policies, interpretations, rules, practices and
procedures developed by other personnel, is not acting in a fiduciary
ERISA is a complex law that must
be carefully followed in order to maintain compliance.
ABOUT THE AUTHOR
Dr. Mark Johnson is a highly experienced
ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary
for a Fortune 500 company, Dr. Johnson has practical knowledge of plan
documents as well as an in-depth understanding of ERISA obligations. He
works on assignments including 401(k), ESOP and pension fiduciary liability;
retiree medical benefit coverage; third party administrator disputes;
individual benefit claims; pension benefits in bankruptcy; long term disability
benefits; and cash conversion balances.
Contact ERISA Expert Dr. Mark Johnson
You can reach Dr. Johnson via email or by phone at 817-909-0778. He is available to confidentially discuss a benefits matter.
Click on the link to read about his representative ERISA cases.