During the recession of 2008/2009, a number of employers suspended or reduced their employer matches to their retirement plans.
While this could potentially be seen as an action taken against the best interest of participants, employers need not fear Employee Retirement Income Security Act (ERISA) participant lawsuits regarding such decisions. Why? Because these decisions are settlor decisions.
“A settlor function would typically be something that is a business decision as it relates to the employee benefits plan,” explains Rhonda Prussack, SVP and head of Fiduciary and Employment Practices Liability at Berkshire Hathaway Specialty Insurance in New York City. “Establishing a plan, terminating a plan and amending plan terms are typically considered settlor functions.”
This contrasts with fiduciary decisions, which require prudence and loyalty, Prussack adds. Examples would be investing plan assets, defraying plan expenses and operating the plan according to the plan document.
Tom Foster, national spokesperson for workplace solutions at MassMutual in Enfield, Connecticut, explains that fiduciaries to a plan exercise control over the management or deposition of assets, provide advice for a fee, and have discretionary authority and responsibility for administration of the plan.
A 402 fiduciary is the named fiduciary in the plan and has ultimate authority. Other fiduciaries could include a 3(16) plan administrator, which performs day-to-day operations; a 3(21) investment adviser, which shares fiduciary responsibility for recommending and monitoring investments; and a 3(38) fiduciary, which has complete responsibility over selecting and monitoring investments. However, Foster warns, retirement plan sponsors can delegate some responsibilities to others, but the ultimate responsibility is on the named fiduciary.
“It is critically important that fiduciaries first know who they are—not everyone is a named fiduciary,” Prussack says. “Sometimes a plan committee is the named fiduciary. However, if a fiduciary is not named in the plan document, then automatically the plan sponsor is the fiduciary—essentially it’s the company’s board of directors. If fiduciaries are not named in the plan document, a court will look at what their duties were, and whether they exercised discretion over the plan and its assets.”
Fiduciaries should act in the best interest of plan participants, make sure they are getting the best plan cost, operate under the prudent man rule, avoid prohibited transactions and self-dealing and monitor other fiduciaries, Foster adds. He also notes that settlor fees may only be paid by the plan sponsor, whereas administrative fees may be paid by the plan.
Wearing two hats
“I think there are a lot of examples where the two interact—where settlor decisions sometimes lead to higher liability or exposure to fiduciaries,” Prussack says. “Company executives typically wear two hats; they are entitled to make decisions in the best interest of company. ERISA allowed for latitude because companies are not required to offer retirement plans. Executives or committees can make a business decision whether to offer a plan, continue a plan, or change terms of a plan. However those decisions may negatively impact plan participants.”
Foster adds that often it is the same person or committee acting as a settlor looking out for the best interest of the employer and acting as a fiduciary looking out for best interest of the plan and participants. For example, many plans have eligibility requirements, and establishing those requirements is a settlor function, but plan fiduciaries have a responsibility to make sure the requirements are met. If an employee is eligible for automatic enrollment in June but not brought into the plan until August, that is a breach of fiduciary duty.
Foster adds that deciding on loan provisions and the definition of compensation in the plan are settlor functions, but a fiduciary must properly implement these provisions. Adding automatic deferral escalation and stretching the match are settlor functions because they are plan amendments, even if to some participants they seem to be not in their best interest. He notes that the plan sponsor has the ability to amend the plan as a settlor function, but regulatory changes that require plan amendment is a fiduciary function to make sure the plan complies with law.
According to Prussack, courts, including the Supreme Court, have made it clear that plan design issues are a settlor matter. “What’s really important is that most plan documents will afford wide latitude to amending the plan and terminating the plan for wide range of reasons. Typically, in plan documents there is broad language and under that, companies can do quite a bit, even if the changes make participants unhappy, and even if the changes impact lower-paid employees. It is important that the plan document is written as broadly as possible,” she says.
“Plan sponsors’ best bet is to consult with someone who is an expert—an ERISA attorney. It would be money well spent in making sure the plan document broadly allows the changes plan sponsors want to make. It is a lot less expensive than getting involved in lawsuit,” Prussack suggests.
Prussack says litigation regarding settlor decisions actually comes up quite a lot, especially where there is a change or cutback in defined benefit (DB) plans, or retiree medical coverage. A plan sponsor’s first line of defense is to say that the folks who made the decision to terminate a pension plan, to annuitize pension benefits or the decision to end retiree medical benefits were wearing a settlor hat, and these are business decisions allowed under ERISA. The common allegation of plaintiffs is that the people making these decisions were in some way acting as fiduciaries because the changes had a negative impact on plan participants.
However, Prussack says, “These lawsuits are not generally successful because the law generally gives wide latitude to plan sponsors to make changes to voluntary benefits.”
Still, it wouldn’t hurt plan sponsors to get insurance coverage for these types of cases, Prussack suggests. “Companies that purchase fiduciary liability insurance want to ensure that costs to defend settlor cases are covered and that they have the broadest wording for settlor capacity claims.”
She explains that settlor coverage only came about around six years ago, but today there are insurance carriers that offer broad wording that says plan sponsors have coverage in their settlor capacity. Other policies say plan sponsors have coverage as a settlor when they do specific activities, such as establishing, amending or terminating plan, but if the settlor decision falls out of these categories, it won’t be covered. “So plan sponsors want really broad wording in their insurance policy,” Prussack says.
Foster says another way to mitigate liability in making settlor decisions is to have two committees, one for settlor functions and another for fiduciary functions.
“Our suggestion would be to work with professionals to help understand when there is a potential for liability,” he says. Foster notes that plan advisers cannot render legal advice, so plan sponsors should seek help from attorneys or certified public accountants (CPAs).
“Obviously changes aren’t made in a vacuum. Plan sponsors have to look at their employee population and making employees ready for retirement. It takes a lot of mental gymnastics to think about what is best for the plan sponsor and what is best for retirement plan participants,” Foster concludes.