The Source and Creation of ERISA Fiduciary Obligations
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 plan.
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 capacity.
ERISA is a complex law that must be carefully followed in order to maintain compliance.
ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
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.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.