ERISA (the Employee Retirement Income Security Act of 1974) is a federal law regulating employee benefit plans, including pension and 401(k) plans. Under ERISA, there are two main roles that individuals and organizations can play in relation to these plans: the role of the settlor and the role of the fiduciary.
The settlor function refers to the person or organization that establishes and funds the employee benefit plan. The settlor is typically the employer or the sponsor of the plan. The settlor is responsible for setting up the plan and making sure that it complies with the legal requirements under ERISA.
On the other hand, the fiduciary function refers to the person or organization responsible for managing and administering the employee benefit plan. The fiduciary is responsible for making sure that the plan is being run in the best interests of the plan participants and beneficiaries. This includes ensuring that the plan is properly funded, that the plan assets are being invested appropriately, and that the plan is being administered according to the terms of the plan document.
One key difference between the settlor and fiduciary functions is that the settlor's role is generally limited to the establishment and funding of the plan, while the fiduciary's role is ongoing and extends to the ongoing management and administration of the plan. Additionally, the settlor is not held to the same level of fiduciary responsibility as the fiduciary.
The settlor function under ERISA refers to the person or organization that establishes and funds the employee benefit plan while the fiduciary function refers to the person or organization that is responsible for managing and administering the plan, and it is subject to a higher standard of care and liability.
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Sample Settlor Functions |
Sample Fiduciary Functions |
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In many instances, employees of an organization may have multiple responsibilities relative a retirement plan. For example, a Chief Financial Officer may act as a fiduciary when deciding on the terms of the plan, should the organization increase or decrease retirement benefits for participants, and also have a fiduciary role as a member of a retirement plan administration and investment committee.
However, there are risks to having employees act as both fiduciaries and settlors to a plan under ERISA.
One of the main risks is the potential for conflicts of interest. If employees act as fiduciaries and settlors, they may be more likely to make decisions that benefit themselves or their employer rather than the plan participants and beneficiaries. This could include decisions about plan investments or contributions that are not in the best interests of the plan.
Another risk is that employees acting as both fiduciaries and settlors may not have the necessary expertise or knowledge to fulfill both roles effectively. Fiduciary responsibilities require a high level of expertise in areas such as investments, tax laws, and plan administration, and employees who are not properly trained may not be able to meet these responsibilities.
Additionally, employees who serve as both fiduciaries and settlors may not be able to separate their roles and responsibilities, which could lead to confusion and mistakes in the management and administration of the plan.
While common and permissible, it is important that individuals understand their role when making decisions about the plan and that related documentation demonstrates that same awareness.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.