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Employee Benefits Security Administration

Information Letter

March 13, 1986

Mr. John N. Erlenborn
Seyfarth, Shaw, Fairweather & Geraldson
1111 19th Street, NW
Washington, DC 20036

Dear Mr. Erlenborn:

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.

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.

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)

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:

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).

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.

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.

Determinations under Section 4044(d)(1) of ERISA

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 -

  1. all liabilities of the plan to participants and their beneficiaries have been satisfied,

  2. the distribution does not contravene any provision of law, and

  3. the plan provides for such a distribution in these circumstances.

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.

Allocation of Assets under Section 4044(d)(2)

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:

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.

The process of allocation is carried out by the plan administrator subject to PBGC regulations.

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.

Choice of Insurer

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).

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.

Lump Sum Interest Rates

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.

Successor Plans

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.

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.

Sincerely,
Dennis M. Kass
Assistant Secretary

Footnotes

  1. 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.