Summary of Major Pension Laws
and Fiduciary Responsibilities
Presented for the
Employees Retirement Plan of the
National Education Association of the United States
by
Paul A. Green
Mooney, Green, Baker & Saindon, P.C.
I. Introduction.
A. Overview
The Pension Plan of the National Education Association (the “Plan”) is governed by a series of interlocking legal requirements. Some of these requirements govern the conduct of the people entrusted to run the plan, some create substantive legal rights for the participants and beneficiaries who benefit from the Plan, while still others impose a maze of technical legal requirements with which the Plan must comply in order to retain its status as a tax exempt organization. The purpose of this Outline is to sort through some of these requirements and provide a brief summary of this interlocking legal framework.
B. Legal History
Until the early part of the 20th century, courts did not know how to handle pension issues. Because they did not involve any immediate reward for services, courts frequently viewed them as gratuitous promises, unenforceable at law. By the 1920s, that had begun to change, as state courts began to apply principles of trust and contract law to pension issues. Despite this increasing sophistication of the state courts, pension regulations were inconsistent from state-to-state, and there were no standards for such important matters as funding, vesting, and the conduct of the people responsible for governing pension plans.
1947 saw the first major piece of federal legislation governing pension plans. That year, Congress passed the Labor Management Relations Act (“LMRA”, also known as the “Taft-Hartley Act”). Intended less as pension reform than as a means of restraining the power of Union-dominated pension funds, the Taft-Hartley Act only applied to plans in which unions representing covered employees were involved in the plans’ management and governance. See, ¶ II.A, p. 2.
In the mid-1960s, Studebaker Corporation, the oldest automobile manufacturer in the United States, collapsed, leaving its pension plan with less than 20% of the assets it needed to pay promised benefits. The scandal that resulted from tens of thousands of former Studebaker employees suddenly finding themselves without their promised pensions created the public pressure necessary to impel Congress toward comprehensive pension reform. This nearly ten-year effort ultimately led to the passage of the Employee Retirement Income Security Act of 1974.
II. Governing Legislation
A. The Requirements of the Labor Management Relations Act of 1947
1. The plan must be governed by a board consisting of equal numbers of employer and employee (union) representatives;
2. The plan must have a means of resolving deadlocks, either by one or more neutrals or by arbitration;
3. The assets of the plan must be held in trust, for the exclusive purpose of providing pensions to covered employees and their beneficiaries;
4. The detailed basis for the payment of contributions and/or benefits must be in writing; and
5. The plan and trust must be audited annually.
B. The Employee Retirement Income Security Act of 1974 (“ERISA”)
1. Consists of four separate, but overlapping, parts:
a. Substantive laws and regulations;
b. Tax provisions consisting of amendments to the Internal Revenue Code (“IRC”);
c. Guaranty provisions; and
d. Coordination provisions.
2. The substantive provisions of ERISA (set forth in “Title I”) are generally duplicated in the amended provisions of the IRC (sometimes referred to as “Title II” of ERISA).
3. The coordination provisions authorized the adoption of “Reorganization Plan No. 4" by Congressional resolution, which defines which of the overlapping provisions of Title I of ERISA and of the IRC are enforced by the Department of Labor and which by the Internal Revenue Service.
III. Fiduciary Responsibility Under ERISA
A. ERISA requires that pension plans be administered by “fiduciaries.” A “fiduciary” is someone with a special duty of trust.
B. The specific fiduciary duties imposed under ERISA are:
1. The duty to act solely in the interest of the plan’s participants and beneficiaries;
2. The duty to act for the exclusive purpose of providing benefits and paying administrative costs;
3. The duty to act prudently;
4. The duty to diversify the plan’s investments; and
5. The duty to follow the plan documents, to the extent they are consistent with the law.
C. Violation of a fiduciary duty will subject the errant fiduciary to personal liability.
IV. “Prohibited Transactions” Under ERISA
A. Unlike the fiduciary duties, the “prohibited transaction” restrictions are “per se” violations, meaning that judgment, intent, etc. are not relevant.
B. The prohibited transaction restrictions are supplemented with a series of prohibited transaction exemptions (“PTEs”) that authorize transactions that would otherwise be prohibited.
C. There are two broad categories of prohibited transactions. The first is where a fiduciary permits a transaction to occur between a plan and a “party in interest.” The second can be best characterized as “self dealing” transactions.
D. A “party in interest” prohibited transaction occurs if a fiduciary permits any of the following transactions to occur between a plan and a party in interest:
1. sale or exchange, or leasing, of any property between the plan and a party in interest;
2. lending of money or other extension of credit between the plan and a party in interest;
3. furnishing of goods, services, or facilities between the plan and a party in interest;
4. transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan; or
5. acquisition, on behalf of the plan, of any employer security or employer real property.
E. A “Party in Interest” includes:
1. any fiduciary, counsel, or employee of the plan;
2. a service provider to the plan;
3. an employer any of whose employees are covered by the plan;
4. an employee organization (union) any of whose members are covered by the plan;
5. a 50% or more owner of an employer or an employee organization described above;
6. a spouse, ancestor, lineal descendant, or spouse of a lineal descendant of anyone described above;
7. a corporation, partnership, or trust or estate that is at least 50% owned by any of the above;
8. an employee, officer, director, or a 10 percent or more shareholder of any of the above; or
9. a 10% or more partner or joint venturer of one of the above.
F. A “Self Dealing” prohibited transaction occurs if a fiduciary:
1. deals with the assets of the plan in his or her own interest or for his or her own account,
2. acts in any transaction involving the plan on behalf of a party whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or
3. receives any consideration for his or her own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.
G. A fiduciary who engages in a prohibited transaction is personally liable for any injury to the plan, as well as for any amounts necessary to reverse the transaction.
V. Prohibited Transaction Exemptions
A. There are three types of PTEs: statutory exemptions, class exemptions and individual exemptions.
1. Statutory exemptions are spelled out in the statute itself.
2. Class exemptions are issued by the Department of Labor, and apply to anyone who meets the standards set out under the terms of the exemption.
3. Individual exemptions are issued by the DOL in response to individual applications, and only apply to the person or entity that requested the exemption.
B. Examples of statutory exemptions are limited provisions permitting plans to own the securities of a participating employer; permitting fiduciaries to receive benefits under the plan on the same terms as any other participant; permitting plans to pay for administrative services from parties in interest; permitting plans to reimburse fiduciary expenses; and permitting plans to compensate fiduciaries, as long as those fiduciaries are not receiving full-time pay from a participating union or employer.
C. Examples of prohibited transaction class exemptions are provisions insulating the management of assets held for investment from the normal prohibited transaction rules, provided those assets are under the control of “professional asset managers;” and a variety of exemptions relating to investments, brokers and insurance companies.
VI. Co-Fiduciary Provisions
A. In addition to being held liable for his or her own unlawful acts, a fiduciary will be held liable for a breach of fiduciary responsibility of another fiduciary:
1. if he or she participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach;
2. if, by his or her own fiduciary violation, he or she has enabled such other fiduciary to commit a breach; or
3. if he or she has knowledge of a breach by such other fiduciary, unless he or she makes reasonable efforts under the circumstances to remedy the breach.
B. A fiduciary can relieve him or herself of direct fiduciary responsibility for day-to-day investment decisions by delegating discretionary investment responsibility to a professional asset manager. The fiduciary retains a duty of oversight, however.
VII. Reporting and Disclosure
A. Plans are required to permit participants and beneficiaries to review the plan’s governing documents, or to buy copies.
B. Plans are required to have an annual audit.
C. Plans must file annual reports with the U.S. government (which include a copy of the annual audit report), which are also available for inspection by participants and beneficiaries.
D. Annually, plans must send out Summary Annual Reports to participants which summarize the information provided in the annual report.
E. Plans must send Summary Plan Descriptions to plan participants, which generally summarize and explain the provisions of the plan.
F. Plans must send notices to participants of material changes in plan benefits.
G. In general, failure to provide requested documents in response to a participant request may result in a fine of up to $110 per day. Failure to file required annual reports may result in a fine of $1,000 per day.
VIII. Enforcement
A. Substantive ERISA Provisions
1. All of the above duties and responsibilities are enforceable in federal court. An action to enforce such duties and responsibilities may be brought on behalf of the plan by any participant or beneficiary, a fiduciary or the Department of Labor.
2. Participants and beneficiaries may also sue for benefits due under the plan in either state or federal court. This is the only type of ERISA action that may be brought in state court.
3. Preemption
a. All state laws that “relate to” an employee benefit plan are preempted, absent an exception.
b. The following are exceptions to preemption:
(1) State insurance laws;
(2) State domestic relations orders, to the extent that such orders constitute “Qualified Domestic Relations Orders;”
(3) State banking laws; and
(4) State criminal laws of “general applicability.”
B. Internal Revenue Code Provisions
1. Most of the requirements stated above are duplicated in the provisions of the Internal Revenue Code (“IRC”).
2. In addition, the IRC imposes numerous other technical requirements on the plan, which, among other things, prohibit discrimination in favor of “Highly Compensated Employees” or “Key Employees,” require minimum coverage, regulate when and how benefits are permitted to be paid, etc.
3. The IRC provisions are not privately enforceable. Rather, compliance with these requirements is a condition of maintaining “qualified status” under Section 401(a) of the IRC. With qualified status, employer contributions are generally tax deductible (obviously not a consideration with a tax exempt employer), contributions are not taxed to the employees, and the earnings of the pension trust are not taxed. Taxation of benefits is deferred until they are actually received by the participants and beneficiaries.
IX. Funding Standards and Guarantees
A. “Defined Benefit” Pension Plans
are subject to “minimum funding standards.”
1. Minimum funding standards require employers whose employees participate in a plan to contribute enough money so that, by the time the employees retire, there will have accumulated enough money to pay all of the promised benefits.
2. In order to determine the appropriate amounts of the employer contributions, each year, defined benefit pension plans are required to obtain an “actuarial valuation report” from an “enrolled actuary.”
3. If an employer fails to pay the amount of its minimum funding contribution, it will be subject to excise taxes. Moreover, a number of courts have held that an employer can be sued for the amount of the deficiency.
B. Benefits under defined benefit pension plans are guaranteed, subject to certain maximum benefit and other limitations, by the Pension Benefit Guaranty Corporation, an agency of the U.S. government. The maximum guaranteed benefit from a single employer or multiple employer plan is currently $3,579.55 per month. The maximum guaranteed benefit from a multiemployer pension plan is currently $1,072.50 per month.
X. Criminal Liability
A. A fiduciary who steals from a pension plan is subject to a fine of up to $10,000 and imprisonment for up to five years, or both.
B. Anyone who falsifies a record required to kept under ERISA is subject to a fine or imprisonment for up to five years, or both.
C. Sending false reports through the mails or by telecopier or Email to or on behalf of a pension plan may constitute mail fraud or wire fraud, which is also a criminal offense.
D. Pension embezzlement (described in Paragraph X.A), mail fraud and wire fraud (described in Paragraph X.C) are all predicate acts under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), which is subject to both criminal penalties and treble damages.