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ERISA: The Distinction between Settlor, Fiduciary and Corporate Functions
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. 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.

 

This caveat is sometimes referred to as the “business decision” exception to ERISA’s fiduciary rules. Under this concept, even though the employer is the plan sponsor and administrator, it will not be considered as acting in a fiduciary capacity when creating, amending or terminating a plan.

 

Among the decisions which would be considered settlor functions are:

 

• Choosing the type of plan, or options in the plan;
• Amending a plan, including changing or eliminating plan options;
• Requiring employee contributions or changing the level of employee contributions;
• Terminating a plan, or part of a plan, including terminating or amending as part of a bankruptcy process.

 

These types of decisions are extremely important and certainly directly impact the plans and the benefits available to participants. But ERISA’s fiduciary duties, both substantive and procedural, do not apply to those who make these settlor decisions even when they are otherwise unquestionably fiduciaries.

 

A plan sponsor is free to amend or terminate its plan at any time. (But there are regulations on communicating certain types of changes prior to the effective date). The ability to amend or terminate a plan which exists pursuant to a collective bargaining agreement might be restricted by the union contract and would likely require bargaining and or union concurrence. While it may be advisable and a good personnel policy practice to seek or consider some less severe alternative to terminating a plan, there is no ERISA obligation, fiduciary or otherwise, to do so.

 

A corporate official who has dual roles is bound by ERISA’s fiduciary roles only when managing the plan, or when directing investment managers; not when performing settlor functions; or when conducting general corporate functions. Fiduciary status is not automatically acquired by one’s position in the corporate structure, i.e. an officer or member of the board of directors; and when fiduciary status is acquired, it is limited to having or exercising discretion over the plan.

 

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.

 

April, 2008

 

 

 

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.

 


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