ERISA Overview: The Employee Retirement Income Security Act of 1974 (ERISA) regulates employee benefit plans, including pension and 401(k) plans. Under ERISA, two key roles are defined: Settlors and Fiduciaries.
Settlors
- Role: Establish and fund the employee benefit plan.
- Responsibilities:
- Setting up the plan.
- Ensuring compliance with ERISA legal requirements.
- Deciding on the terms of the plan document.
- Examples:
- A company’s board of directors deciding to establish a new retirement plan.
- Executives determining the level of employer contributions.
Fiduciaries
- Role: Manage and administer the employee benefit plan.
- Responsibilities:
- Running the plan in the best interests of participants and beneficiaries.
- Ensuring proper funding and appropriate investment of plan assets.
- Administering the plan according to the plan document.
- Monitoring the plan and fulfilling reporting and disclosure requirements.
- Selection and monitoring of the investments offered in the plan.
- Examples:
- Plan administrators overseeing daily operations.
- Investment committees making decisions about asset allocation.
Key Differences:
- Settlors: Focus on the initial setup and future funding levels.,
- Fiduciaries: Responsible for the ongoing management and a higher standard of care and liability.
Example: A chief financial officer may act as a settlor when deciding on eligibility and employer contribution levels, and also serve on a retirement plan administration and investment committee making decisions regarding how the plan is operated and funded.
Risks: Employees acting as both fiduciaries and settlors may face conflicts of interest when managing their various responsibilities. For instance, a settlor may have an obligation to the employer and its shareholders to freeze employer contributions to the plan. A fiduciary committee member would never have an obligation to do anything that wasn’t in the best interest of plan participants.
Best Practices:
- Training: Ensure that all fiduciaries receive proper training on their responsibilities and ERISA requirements.
- Documentation: Keep thorough records of all decisions and actions taken in relation to the plan and in what context decisions are made.
- Regular Reviews: Conduct regular reviews of the plan’s performance and compliance with legal requirements.
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