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”
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
• 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.
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.