OLR Research Report

April 11, 2008




By: Rute Pinhel, Research Analyst

You asked several questions concerning sSB 652, An Act Concerning Small Business Retirement Plans. Your questions and the respective answers follow.

The Office of Legislative Research is not authorized to provide legal opinions and this report should not be considered one.

Would the bill, as it is currently drafted, be in compliance with the Employee Retirement Income Security Act (ERISA)?

ERISA was enacted in 1974 as a federal regulatory scheme for private sector employee benefit plans. It sets forth requirements for benefit plan participation, funding, and vesting of benefits. It also establishes uniform standards for reporting, disclosure, and fiduciary duties to ensure that employee benefit plans are established and maintained in a fair and financially sound matter.

sSB 652 requires the state comptroller to establish a tax-qualified defined contribution retirement program to provide retirement investment plans, including 401(k) plans, to (1) self-employed individuals, (2) businesses with 100 or fewer employees, and (3) certain nonprofit organizations. In its current form, SB 652 does not appear to conflict with ERISA. It establishes a voluntary program and does not place any requirements or duties on participating employers that would be preempted by ERISA.

However, the underlying employer-sponsored plans would still be subject to ERISA. (It appears that the retirement plans for self-employed individuals would not be subject to ERISA requirements because they are not employer-sponsored plans.) Employers must provide promised benefits and satisfy ERISA's requirements for managing and administering plans. ERISA requires the people and entities that manage and control plan funds to:

1. manage plans for the exclusive benefit of participants and beneficiaries;

2. carry out their duties in a prudent manner and refrain from conflict-of-interest transactions expressly prohibited by law;

3. comply with limitations on certain plans' investments in employer securities and properties;

4. report and disclose information on plans' operations and financial condition to the government and participants; and

5. provide documents required in investigations to ensure compliance with the law.

If the bill is in compliance with ERISA, would the state be named as a fiduciary? If so, would the state be subject to any liability?

In general, people who exercise discretionary authority or control over the management of a plan or disposition of its assets are “fiduciaries” for purposes of ERISA. Fiduciaries are required, among other things, to discharge their duties solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan.  In discharging their duties, fiduciaries must act prudently and in accordance with documents governing the plan, to the extent such documents are consistent with ERISA.

SB 652 does not specify the extent to which the state would exercise discretionary authority or control over the program's assets. The services the Comptroller's Office provides or functions it performs relative to the plans would affect the state's potential fiduciary liability. While the Comptroller's Office may not be directly involved in making investment decisions, actions such as choosing the plan options available to program participants could be considered fiduciary decisions. These

details would likely be worked out through the comptroller's agreement with the program's third-party administrator and the small businesses and individuals enrolled in the program.

It is not clear whether the state would face any other liabilities associated with the pension plans, not necessarily related to ERISA. Maryland recently issued a study concerning the feasibility of a state-sponsored voluntary employee accounts program (VEAP) similar to the proposed program under sSB 652. The board of trustees charged with supervising and administering Maryland's teachers' and state employees' supplemental retirement plans—Maryland Supplemental Retirement Plans—conducted the VEAP study. It concluded that Maryland could not eliminate the risk of state liability due to administrative and fiduciary mistakes, but could limit its risk through prudent practices and program design.

The study identified four types of liability associated with pension plans:

Loss of expected tax benefits—if certain small businesses are promised a tax deduction but do not receive it because they are not legally eligible for the type of plan or account established. The state could incur liability if it failed to adequately supervise the program's eligibility standards and sales practices and large numbers of ineligible transactions occurred.

Government penalties—the Department of Labor (DOL) or Internal Revenue Services (IRS) could impose penalties if forms are not filed on time or if transactions are not properly conducted.

Accounting mistakes—the state could face expense or loss created by improperly recorded transactions or other record keeping failures.

Breach of fiduciary duty—this would occur if individuals were sold an improper investment or received misleading communications about investments.

The study notes that the potential liability due to the state's breach of fiduciary duty is “probably remote” but could be greatly reduced if the state designed the VEAP to:

1. insist on indemnification from all vendors associated with the program,

2. severely limit investment options to reduce the possibility of miscommunication or employees making unsuitable choices,

3. restrict sales practices so that vendors may not sell other investment products to plan participants,

4. provide a well-funded professional staff to supervise the program,

5. provide a simple program structure to reduce the likelihood of accounting mistakes, and

6. retain specific control, through the program's organizing documents or investment options and administrative structure, to eliminate faulty practices.

MSRP concluded that these efforts would bring the potential for liability from the VEAP in line with the liability that exists in numerous other state entities.

Would the state be able to “recover from program assets expenses incurred to initiate, operate and administer the program” given the U.S. Department of Labor advisory opinions 2001-01A and 1997-03A?

Under ERISA, the fiduciary must determine whether to pay particular expenses out of plan assets. The plan assets must be held for the exclusive purpose of providing the participants and beneficiaries benefits and defraying reasonable administrative expenses. Accordingly, the fiduciary must act prudently and solely in the interest of the plan participants and beneficiaries, and in accordance with the documents governing the plan, to the extent such documents are consistent with ERISA.

Both of the advisory opinions you referenced refer to the DOL's interpretation of the type of administrative expenses that may be charged to plan assets. According to the advisory opinions:

…the Department has long taken the position that there is a class of discretionary activities which relate to the formation, rather that the management, of plans. These so-called “settlor” functions include decisions relating to the establishment, design and termination of plans and, except in the context of multiemployer plans, generally are not fiduciary activities subject to Title I of ERISA…. Expenses incurred in connection with the performance of settlor functions would involve services for which an employer could reasonably be expected to bear the cost in the normal course of business or operations.

Based on this guidance, it would appear that the costs related to establishing, amending, or terminating employee benefit plans are not considered reasonable administrative expenses. They would have to be paid by the employer or plan sponsor and cannot be paid with plan assets.

sSB 652 would require the comptroller to recover from plan assets the expenses her office incurs to initiate, operate, and administer the program. It is likely that the third-party administrator would collect these costs through the administrative fees charged to each plan participant and then reimburse the Comptroller's Office. Given the DOL opinions you referenced, it appears these cannot include costs related to establishing the plans.

Would the comptroller be able to combine the funds from the state's existing voluntary retirement savings program and the newly created 401(k) plans?

In general, ERISA does not apply to plans established or maintained by government entities or churches for their employees, or plans that are maintained solely to comply with workers' compensation, unemployment, or disability laws. Combining the state's existing voluntary retirement savings program with the plans proposed in sSB 652 would likely affect the current program's ERISA exemption. Moreover, given that the programs involve plans governed by different sections of the Internal Revenue Code, combining them may affect their tax status.