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An ERISA Foundation Q&A Part 1
Last Updated: November 08, 2011
After our recent Educational Series webinar on An ERISA Foundation: Laying the Groundwork for Successful Fiduciary Oversight, Chase Tweel, J.D., LL.M., a Pension Consultants ERISA Analyst responded to the questions the audience asked. There were so many great questions that we’ve broken the Q&A into two sections. Here’s “Part 1” of what he had to say.
Question: From the webinar, I learned that employees’ benefits plan provided by the state, such as a state-funded community college, are exempt from ERISA. But what about the 403(b) plans that are offered as an alternative to the employees, do they have to follow the ERISA standards?
Chase: That’s a good question, and the short answer is, no. The 403(b) plans that are sponsored by governmental employers are exempt from ERISA’s requirements. Some types of 403(b) plans are subject to ERISA. The determining factor in whether or not ERISA is going to apply to one of these special types of plans, such as a 403(b) plan, hinges on the status of the employer. Two types of employers can sponsor a 403(b) plan, governmental plans and certain private organizations that qualify as 501(c)(3)s, charitable organizations. The charitable organizations that are private and sponsor a 403(b) plan have a choice whether or not they want the plan to be subject to ERISA.
There is an ERISA safe harbor under the 403(b) rules that allow charities to exempt their plans from ERISA if they meet a certain set of requirements. If they don’t meet those requirements, then the plan will be subject to ERISA.
Going back to the original question, if it’s clearly determined that the employer is a governmental employer, you don’t even need to look at the ERISA safe harbor for 403(b) plans. All of the plans will be exempt from ERISA by virtue of the employer’s governmental status.
Question: How do I know who to be designated a named fiduciary? What kind of guidance can you provide on that?
Chase: Who should be the named fiduciary is a different question than from who is the named fiduciary. I’ll first address how you know who the named fiduciary is under the plan. The first place to look is the plan document. Most likely in the definitional section or in the plan administration section you’ll see the employer named as the named fiduciary. Now, that’s a pretty broad, not very helpful or specific provision if it’s just the employer name. The next place to look would be at board resolution to see who the employer, as a named fiduciary, has actually delegated specific responsibilities of plan administration.
The question “who should be the fiduciary in a plan?” is going to vary depending on the size and complexity of the plan and depending on the size and complexity of the employer. In a small plan sponsored by a relatively small employer, it may be sufficient to have a single individual who’s the benefits director or who has responsibility for human resource duties to be named as the plan administrator.
I always tend to think it’s a better idea to have the named fiduciary be a committee. How important that is will hinge on the size and complexity of the plan and the employer.
For very large employers who have multiple participating entities and who have a complex set of plan features, I think it becomes more important, then, to have an entity such as a retirement plan committee or multiple committees named as the fiduciary. If not actually the named fiduciary, such committees should be vested with the primary fiduciary responsibilities from the named fiduciary.
Question: Can you explain what “unfunded” means in relation to top hat plans?
Chase: One of the top hat plan requirements is that the assets of the plan can be nothing more than an unfunded, unsecure promise to pay benefits or compensation in the future. This is quite the opposite of qualified plans that actually require a trust to be funded. This idea of what is an unfunded, unsecure promise to pay benefits in the future isn’t a black and white proposition. In fact, there has been a lot of litigation as to what constitutes unfunded, unsecure promise to pay benefits. To summarize 60 or 70 years worth of case law, where we are today and have been for several decades is this idea of a rabbi trust.
A rabbi trust is basically as close as you can get to securing benefits for participants and beneficiaries of the plan without actually funding the plan. A rabbi trust is a trust where you could put assets, and it will be secure from all things except for judgment claims from the employers’ creditors. So should the company go bankrupt and owe debts to its creditors, the participants and beneficiaries of that plan wouldn’t lose out to those creditors. In a nutshell, that’s what it means to be unfunded.
That’s very important for top hat plans because, should they fail that requirement and should the trust of the plan become fully funded, then it would fill the top hat requirements and then retroactively be subject to the requirements of ERISA.
Question: Do brokers who make fund recommendations need to take some fiduciary responsibility?
Chase: This is an interesting question. There are three categories of functional fiduciary conduct rules. One of those three actions is providing investment advice for a fee. So whether or not a broker’s mutual fund recommendation would constitute fiduciary status under that rule would be whether or not a fee is involved. In this scenario, the compensation or fee that the broker receives may not be direct. In most arrangements, this would constitute a fiduciary act; however, it’s important to note that this is an evolving area of the law. The current five factor test, which the current regulation uses to determine if advice is considered fiduciary investment advice, is largely dependent on the facts and circumstances. With pending regulations, the likelihood of this type of scenario evading fiduciary status is going to decrease when, and if, the current proposed rule on fiduciary investment advice is reformed.
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