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Mr. John N. Erlenborn
Seyfarth, Shaw, Fairweather & Geraldson
1111 19th Street, NW
Washington, DC 20036
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Dear Mr. Erlenborn:
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In your capacity as chairman of the Advisory Council on Employee Welfare and
Pension Benefit Plans, you have requested an opinion of the Department of
Labor regarding the interplay between the fiduciary responsibility
provisions of ERISA and pension plan terminations. Specifically, it appears
that several witnesses at the public hearing held by the Advisory Council
Task Force on Termination Reversions on January 13, 1986, raised questions
regarding the extent to which ERISA’s fiduciary duty rules would apply to
the decision to terminate a pension plan and activities undertaken pursuant
to that decision. You indicated that a Departmental opinion on these issues
would be helpful to the Advisory Council Task Force in its current
deliberations.
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Pursuant to your request, we have examined past Departmental pronouncements
and court cases relevant to this area. Although it is difficult to provide
detailed guidance in the absence of specific factual situations, we believe
there are a number of general conclusions which may be helpful to the
Advisory Council Task Force.
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First, in light of the voluntary nature of the private pension system
governed by ERISA, the Department has concluded that there is a class of
discretionary activities which relate to the formation, rather than the
management, of plans. These so-called "settlor" functions include
decisions relating to the establishment, termination and design of plans and
are not fiduciary activities subject to Title I of ERISA. In Congressional
testimony, the Department has consistently taken the position that the
decision to terminate a pension plan is such a settlor, or business activity
and is therefore not subject to ERISA’s fiduciary duty requirements.
Courts have agreed with the Department’s analysis in light of the
voluntary nature of the private pension system and ERISA’s overall
statutory scheme. See, for example, U.A.W. District 65 v. Harper & Row,
Inc., 576 F. Supp. 1468 (S.D.N.Y. 1983); Walsh v. Great Atlantic and Pacific
Tea Co., 96 F.R.D. 632 (D.N.J. 1983), aff’d 726 F.2d 956 (3rd Cir.);
Washington-Baltimore Newspaper Guild v. Washington Star Co., 555 F. Supp.
257 (D.D.C 1983).(1)
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Although the decision to terminate is generally not subject to the fiduciary
responsibility provisions of ERISA, the Department has emphasized that
activities undertaken to implement the termination decision are generally
fiduciary in nature. As you are aware, fiduciary activities governed by
Title I of ERISA are not restricted to activities undertaken by fiduciaries
denominated as such. Rather, as a general matter, ERISA establishes a
functional approach to determine whether an activity is fiduciary in nature.
Section 3(21)(A) of ERISA states:
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Except as otherwise provided in subparagraph (B), a person is a fiduciary
with respect to a plan to the extent (i) he exercises any discretionary
authority or discretionary control respecting management of such plan or
exercises any authority or control respecting management or disposition of
its assets, (ii) he renders investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or other
property of such plan, or has any authority or responsibility to do so, or
(iii) he has any discretionary authority or discretionary responsibility in
the administration of such plan. Such term includes any person designated
under section 405(c)(1)(B).
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Pursuant to this provision, the Department has indicated that it will
examine the types of functions performed, or transactions undertaken, on
behalf of a plan to determine whether such activities are fiduciary in
nature and therefore subject to ERISA’s fiduciary responsibility
provisions. 29 CFR §2509.75-8, D-2. Although persons holding certain
positions with a plan (for example, plan administrator) will be plan
fiduciaries because of the discretionary nature of the duties attendant upon
such position, fiduciary status is not limited to persons occupying those
positions. Rather, it is the function performed that will determine
fiduciary status. 29 CFR §2509.75-8, D-3. Thus, for example, the employer,
or officers or directors of the employer, will be subject to the fiduciary
provisions of ERISA to the extent that the employer’s functions with
regard to the plan are among the types of activities enumerated in ERISA
section 3(21)(A). 29 CFR §2509.75-8, D-4.
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In light of this functional approach, we have examined a number of examples
of activities undertaken pursuant to the decision to terminate. This is not
intended to be an exhaustive treatment of all possible scenarios; rather,
the purpose of these analyses is to provide guidance as to the factors
relevant to each determination.
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Determinations under Section 4044(d)(1) of ERISA
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Section 4044(d) sets forth three conditions which must
be met before surplus assets may revert to the plan sponsor upon
termination:
Any residual assets of a single employer plan may be
distributed to the employer if -
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all liabilities of the plan to
participants and their beneficiaries have been satisfied,
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the distribution does not contravene
any provision of law, and
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the plan provides for such a
distribution in these circumstances.
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The first of these conditions - the satisfaction of liabilities - is
discussed below. The other two criteria involve the interpretation of plan
documents to determine if a reversion is allowed and the identification of
legal considerations governing the disposition of plan assets in the form of
a reversion. Both of these undertakings involve discretionary authority or
discretionary responsibility in the administration of the plan, and as a
result, an individual exercising this authority or responsibility would be a
fiduciary pursuant to section 3(21)(A)(iii) of ERISA.
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Allocation of Assets under Section 4044(d)(2)
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Section 4044 of ERISA requires that the plan administrator allocate assets
upon termination to benefit classes in the order prescribed in section
4044(a). As noted above, section 4044(d)(1) describes the circumstances
under which a plan sponsor may receive a reversion of surplus assets.
Section 4044(d)(2) contains a special rule dealing with surplus assets in
the case of a contributory defined benefit plan:
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Notwithstanding the provisions of paragraph (1), if any assets of the plan
attributable to employee contributions remain after all liabilities of the
plan to participants and their beneficiaries have been satisfied, such
assets shall be equitably distributed to the employees who made such
contributions (or their beneficiaries) in accordance with their rate of
contributions.
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The process of allocation is carried out by the plan administrator subject
to PBGC regulations.
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Pursuant to the foregoing discussion of fiduciary
activity, it appears that allocation decisions under section 4044,
including section 4044(d)(2), are fiduciary decisions. The allocation of
assets is among the first steps taken to implement the decision to
terminate a plan. Allocation decisions clearly involve the type of
disposition of plan assets generally treated as fiduciary activity. Thus,
when the plan administrator acts pursuant to section 4044, his activities
will also be subject to the fiduciary duty provisions of ERISA.
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Choice of Insurer
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Current law requires that, as a general rule, a plan
provide for benefits upon termination through the purchase of an annuity.
29 CFR §§ 2617.4(a), 2617.21. The PBGC does not maintain standards
governing the identity, financial status, etc. of insurers issuing
annuities to close out plans. Such matters are generally the subject of
state insurance regulation. However, where more than one insurer is
available to issue an annuity closing out a plan, it is incumbent upon the
plan administrator to choose among such insurers. See 29 CFR §2617.21(a)
(the duty of purchasing the annuity with plan assets rests with the plan
administrator).
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Consistent with the functional analysis of fiduciary
activity, the choice of an insurer would appear to involve the type of
discretionary authority over the disposition of plan assets covered in
section 3(21)(A). Regulation 29 CFR §2617.21(a) requires that, within
ninety days after the date of the Notice of Sufficiency, the plan
administrator shall allocate and distribute plan assets by
"purchasing from an insurer contracts to provide benefits required
... to be provided in annuity form." Therefore, it appears that the
fiduciary provisions of ERISA, including the prudence requirement of
section 404(a)(1)(B), will apply to the choice of an insurer to issue
annuities upon plan termination.
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Lump Sum Interest Rates
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PBGC regulation 29 CFR §2617.4(b) provides that, under
certain circumstances, a benefit payable as an annuity under a plan may be
provided as a lump sum payment upon plan termination. PBGC regulation 29
CFR §2619.26(b) provides that the present value of the benefit payable in
lump sum form must be determined in light of reasonable actuarial
assumptions as to interest and mortality. PBGC regulation 29 CFR
§2619.26(c)(2) lists several interest rate assumptions which are among
those the PBGC will normally consider to be reasonable. The implication of
this regulation is that the plan administrator may have a choice as to the
interest rate to be used in determining the present value of benefits for
the purpose of making lump sum payments. The choice of interest rate will
directly affect the amount of the lump sum payments, and thus the amount
of plan assets to be allocated to make those payments. Such a
determination appears, therefore, to involve discretionary authority over
the disposition of plan assets. Consistent with the foregoing analysis,
the choice of an interest rate in order to determine the amount of a lump
sum payment should be treated as fiduciary activity.
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Successor Plans
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Many termination/reversion situations also involve
decisions relating to the establishment and design of successor plans
after a valid termination. Although such decisions may be made as part of
the initial decision to terminate the current plan, we believe that the
decision of whether to establish a successor plan, and if so, the type of
such a plan, are clearly business decisions not subject to Title I of
ERISA. As in the case of the decision to terminate, the decision to
establish a successor plan involves the exercise of wholly voluntary
settlor functions. Similarly, decisions about the design and provisions of
any successor plan are not subject to Title I.
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As noted above, a more detailed analysis of issues
arising in this area may be possible only in the presence of a concrete
factual situation. Even under such conditions, the Department may not be
in a position to opine on questions such as the prudence of specific
courses of activity. In any event, we hope that this general analysis will
be helpful to the Advisory Council Task Force in its deliberations.
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Sincerely,
Dennis M. Kass
Assistant Secretary
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It is possible that a decision to
terminate a collectively bargained plan may be treated differently
under ERISA. See Delgrosso v. Spang and Co., 769 F.2d 928 (3rd Cir.
1985) (employer attempt to unilaterally terminate collectively
bargained plan and receive a reversion violated ERISA fiduciary
provisions because negotiated terms prohibited termination and
reversion). Such distinctions may, however, be due to the facts of the
particular case, or to the fact that the settlor function in a
collectively bargained situation may not be exercised by the employer
alone.
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