The DOL takes a lead role in requiring compliance with ERISA's required disclosures, fiduciary responsibilities and bans on prohibited transactions. An array of causes of action exist under ERISA, allowing for private civil suits, criminal actions, civil penalties, sanctions and civil actions by the DOL.

Employer-sponsored retirement plans

ERISA requires the use of a written plan document to establish an employee benefit plan. The document must name one or more fiduciaries who will manage the plan. Plan assets are held in a trust. A system is required to provide plan documents and information to employees, keep accurate records of funds flowing to and from the plan and provide for an annual report to the Employee Benefits Security Administration, a division of the DOL. This annual report provides detailed information on the assets and liabilities of the plan.

Determining whether a person or entity is a fiduciary is a threshold question in assessing whether a breach of a fiduciary duty has occurred under ERISA. A plan administrator chosen by the employer, members of a board of directors and trustees of a retirement plan all may have fiduciary responsibilities to the plan participants. An employer is usually the “plan sponsor” who designs the plan, but the employer may also act as a fiduciary in the implementation and administration of the plan. If an employer hires someone else to provide fiduciary functions, the employer remains responsible for the choice of the fiduciary and monitoring the chosen fiduciary.

Determining whether a person or entity has a fiduciary responsibility to plan participants is a functional inquiry, which is determined by examining whether the person or entity has discretionary authority to administer or manage the plan or its assets or provides investment advice for compensation. Fiduciaries have the responsibility to diversify investments, follow plan documents and act prudently and with sole loyalty to plan participants. In sum, an ERISA fiduciary must act in the interests of the plan participants or risk liability. In addition to actions for breaches of fiduciary duty, plan participants can also seek remedies for improper denial of benefits and interference with their rights under ERISA.

Broadly speaking, employer retirement plans are either defined benefit plans or defined contribution plans. With defined benefit plans, such as a traditional pension, there is a pre-established level of benefits that the retired employee will receive and the plan administrator normally has control over the invested assets. In terms of investment of employees' retirement assets, these plans must be fully funded by the employer. The employer bears the risk of a decrease in value of invested assets and might be required to make additional contributions to satisfy its obligations.

Further, defined benefit plans must be insured by Pension Benefit Guaranty Corp. In addition, ERISA dictates that a plan may not engage in a “prohibited transaction.” For example, there are limits on the amount of assets that can be invested in the securities of the employer. Other prohibitions focus on potential conflicts of interest or regulating the plan administrator's ability to engage in transactions that may be adverse to the interests of plan participants.

Investments in defined contribution plans, such as a 401(k), are chosen by plan participants. While plan administrators are not liable for losses in defined contribution plans, they are still required to provide sufficient information to employees to allow them to make informed decisions and provide for an array of investments that allow an employee to choose a diversified investment portfolio. While investment in securities of the employer are permitted in these plans, guidelines exist to allow employees to divest themselves of employer securities.  Employers must provide notice to employees to make them aware of when they are entitled to divest their account of employer securities.

There are also ERISA regulations regarding information that must be provided to employees regarding their rights and obligations, as wells as plan expenses and fees. Employers must provide employees with a Summary Plan Description (SPD). The SPD is a plain-language document providing detailed information regarding the benefits provided by the plan, when an employee is eligible to participate, when benefits becomes vested (owned) by the employee, and the remedies available to an employee.

Employees who are 21 years of age or older and have completed at least one year of service must be permitted to participate in a retirement plan if one is offered by the employer. If the plan allows for 100 percent vesting after two years of service or less, the plan may extend the years of service requirement to two years. There are also restrictions on accrual of benefits that are designed to prohibit age discrimination in the administration of retirement plans.

Summary

Due to the significant tax benefits offered by employer-sponsored retirement plans, as well as the societal interest in ensuring that employees have the opportunity to save for retirement, ERISA has evolved into a broad tool to regulate such plans and allow for enforcement of breaches of a fiduciary's obligation to act in the interest of plan participants. While the regulatory burden in complying with its requirements is significant, ERISA offers clear remedies and access to information for employees participating in employer-sponsored retirement plans and provides a safeguard against mismanagement of their retirement savings.

Joseph N. Frabizzio is of counsel at Robson & Robson where he focuses his practice on tax planning and controversy. Frabizzio holds an LL.M. in taxation and helps clients minimize their federal and state tax obligations associated with business transactions. He also assists clients with complex trusts and estates issues and succession planning. He can be reached at 610-825-3009 or [email protected].