5.2 Impact of Erisa

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5.2 IMPACT OF ERISA

5.201 In General. The Employee Retirement Income Security Act of 1974 (ERISA) ²⁰ applies, with few exceptions, to employee welfare benefit plans and employee pension benefit plans of an employer that is engaged in commerce, industry, or any activity that affects commerce. ²¹ Generally, only plans maintained by governments and churches escape regulation by

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ERISA. ²² In addition, plans that do not cover any employees are not covered by ERISA. Plans that cover no employees include those that only cover partners, sole proprietors, and 100-percent shareholders of an incorporated business and their spouses. ²³ Since its enactment in 1974, ERISA has been amended from time to time to reflect the tax law changes, but its fiduciary responsibility rules and reporting and disclosure provisions have remained relatively unchanged by legislation. Recent litigation has brought increasing attention to the fiduciary responsibility provisions and the attendant liabilities imposed on the individuals and institutions that act in the capacity of fiduciaries under ERISA-covered plans.

5.202 Preemption of State Law. One of the most pervasive impacts of ERISA is its preemption of state law. Preemption applies to any state law that relates to employee benefit plans as defined in ERISA other than certain types of plans that are specifically saved from the application of ERISA, such as plans maintained to comply with state workers' compensation, disability laws, and the business of insurance. ²⁴ Case law has extended the reach of preemption beyond what many employers thought possible. ²⁵ The few areas in which ERISA does not preempt state law are noted throughout this chapter.

5.203 Written Plan Document and Fiduciary Procedures. To enable participants and beneficiaries to determine their rights, each ERISA-covered plan must be in writing and must designate at least one "named fiduciary" who has stated responsibility for the administration of the plan. ²⁶ The plan must provide procedures that are consistent with both the plan's objectives and ERISA for implementing its funding policy, for participants' claims, for effecting amendments to the plan, and for allocating administrative responsibilities by fiduciaries. ²⁷ Without a specific plan provision authorizing the delegation, no named fiduciary may delegate any fiduciary responsibilities with respect to the plan. Therefore, if a named fiduciary does not have the authority to delegate, the named fiduciary will be jointly and severally liable for the acts of other fiduciaries.

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The claims procedure must comply with specific requirements detailed in ERISA regulations. ²⁸ These regulations provide rules governing the filing of benefit claims, notification of benefit determinations, and appeal of adverse benefit determinations. The regulations include specific provisions regarding, among other things, preauthorization procedures, disability benefits, urgent care claims, internal appeals, and arbitration.

5.204 Definition of Fiduciary. ERISA's definition of a fiduciary is broader than the definition found in traditional trust law. ERISA's definition includes any person who (i) exercises any discretionary authority over the management of the plan or the disposition of plan assets; (ii) provides investment advice for the plan for which the person receives direct or indirect compensation; or (iii) has authority for the administration of the plan. ²⁹ ERISA fiduciaries generally include the trustee, individuals who actively administer the plan and who have discretionary authority, the members of a plan's investment and administrative committees, if any, and the persons who control the selection of fiduciaries for the plan and its investment advisors. Attorneys, accountants, and actuaries, who only provide professional advice to the plan, and registered brokers whose sole function is to execute trades are normally not considered fiduciaries under ERISA's definition.

Many post-Enron lawsuits seek to impose broad fiduciary liability on directors and officers not otherwise designated as plan fiduciaries. In addition, the Department of Labor (DOL) has expressed an unusually broad view of who is a fiduciary.

In April 2016, the DOL issued final regulations to define who may be considered a "fiduciary" under ERISA by reason of providing investment advice to an employee benefit plan. ³⁰ The regulations replaced the previous definition of an investment advice fiduciary, which required a person to satisfy a five-part test in order to be considered a fiduciary subject to ERISA's fiduciary duties, with a definition that is substantially broader in scope. The final regulations become effective on April 10, 2017.

Under the DOL's final regulations, a person may be considered a fiduciary if that person renders investment advice with respect to moneys or other property of a plan or IRA for a fee or other compensation, direct or

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indirect, and (i) the advice constitutes a "recommendation" and (ii) the recommendation relates to:

• The advisability of acquiring, holding, disposing of, or exchanging securities or other investment property or a recommendation as to how such securities or other investment property should be invested after the securities are rolled over, transferred, or distributed from the plan or IRA; or

• The management of securities or other investment property, including recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (brokerage versus advisory), or recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination that rollover, transfer, or distribution should be made; and

• The recommendation is made by a person who:

• Represents or acknowledges that it is acting as a fiduciary;

• Renders the advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular investment needs of the advice recipient; or

• Directs the advice to a specific advice recipient regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

For purposes of the regulation, the term "plan" includes employee pension benefit plans and welfare benefit plans as described in section 3(3) of ERISA, ³¹ qualified retirement plans described in I.R.C. § 401(a), I.R.C. § 403(b)

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plans subject to ERISA, IRAs, Archer medical savings accounts, and health savings accounts.

The regulation identifies a number of communications that, subject to certain conditions, are not considered "recommendations" under the regulation. The following are some examples of information that is excluded from the scope of the rule:

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• Investment platforms that are marketed to plan fiduciaries without regard to the individualized needs of the plan, its participants, or its beneficiaries, such as qualified default investment alternatives;

• Objective financial data and comparisons with independent benchmarks provided to a plan fiduciary;

• General communications that a reasonable person would not view as investment recommendations, such as general circulation newsletters, commentary in publicly broadcasted talk shows, general marketing materials, and general market data;

• Investment educational information and materials (provided that the information and materials are not combined with other recommendations as to specific investment products or management of those products), such as—

• Plan information that describes the terms or operation of the plan or IRA, inform of the benefits of plan participation or of increasing contributions to a plan, the impact of preretirement withdrawals on retirement income, retirement income needs, varying forms of distributions, the advantages and disadvantages and risks of different forms of distributions, and fee and expense information;

• General financial, investment, and retirement information on matters that do not address specific investment products, specific plan or IRA investment alternatives or distributions options available, such as general financial and investment concepts like risk and return, historic differences in rates of return between asset classes, effects of fees and ex-

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	penses on rates of return, and determining investment time horizons;
•	Asset allocation models, such as pie charts, graphs, or case studies that provide models of asset allocation portfolios of hypothetical individuals with different time horizons and risk profiles, provided that they satisfy certain requirements such as that they are based on generally accepted investment theories and take into account the historic returns of different asset classes over defined periods, certain information relevant to the models accompanies the information provided in them, and the models do not include or identify specific investment products; and
•	Interactive investment materials, such as worksheets and software that assist in estimating future retirement income needs and assess the impact of different asset allocations on retirement income, evaluate distribution options, products, or vehicles, or estimate a retirement income stream that could be generated by an actual or hypothetical account balance, provided that they satisfy certain requirements, such as that they do not identify specific investment alternatives or distribution options available under the plan or IRA.

The above examples of information and communications excluded from the definition of "recommendation" under the rule are general summaries. A thorough review of each exclusion and the conditions applicable to that...