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Fiduciary Duty Implicated in Addition of Employer to Multiemployer Plan


Guest ethompson

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Guest ethompson

Trustees of Multiemployer plan have been approached to allow in two additional employers, both of which have a significant underfunded liability on their existing plans. Would the addition of these employers to the plan (which currently has a funding surplus) implicate fiduciary liability of the trustees of the multiemployer plan?

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Are you asking about a potential merger of three plans?

Yes, trustees have a fiduciary liability to do what is best for the participants of the plan.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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I'm not sure that is completely correct. From a fiduciary standpoint that would typically be a "settlor" function. DOL was always a little bit "sideways" on the settlor/fiduciary distinction in the multi world, but in 2002 they came out with a Field Assitance Bulletin whose conclusion was:

In our view, where relevant documents (e.g., collective bargaining agreements, trust documents, and plan documents) contemplate that the board of trustees of a multi-employer plan will act as fiduciaries in carrying out activities which would otherwise be settlor in nature, such activities would be governed by the fiduciary provisions of ERISA. In our view, such designation by the plan would result in the board of trustees exercising discretion as fiduciaries in the management or administration of a plan or its assets when undertaking the activities. However, where, as here, the relevant plan documents are silent, then the activities of the board of trustees which are settlor in nature generally will be viewed as carried out by the board of trustees in a settlor capacity, and such activities would not be fiduciary activities subject to Title I of ERISA.

You can find the entire FAB here:

http://www.dol.gov/ebsa/regs/fab_2002-2.html

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As an addendum to my last statement, back in the late 1980's before the development of the settlor/fiduciary distinction in a trio of Supreme Court cases (and before the FAB referenced above), the DOL did take the position that fiduicary duties were implicated in a merger but the analysis should looked to the funded status of the merged plan. However, look at f.n. 8 where DOL says this is a multi-only rule. It took a long time for DOL to accept the settlor/fiduciary distinction in a multi context and they were not buying into it in 1989. I think the FAB analysis "trumps" this 1989 Advisory Opinion at least the 404 analysis below.

Department of Labor.

Pension & Welfare Benefit Programs.

OPINION 89-29 A

September 25, 1989

Re: Textile Workers Pension Fund, Identification No.: F-3813A

REQUESTBY:

Ronald E. Richman, Esq.

Chadbourne & Parke

1230 Avenue of the Americas

1st Floor

New York, NY 10112

OPINION:

This is in response to your letters requesting an advisory opinion regarding the application of sections 403, 404 and 406 of the Employee Retirement Income Security Act of 1974 (ERISA) to the proposed merger of three multiemployer pension plans.

You represent that the Textile Workers Pension Fund (the Fund) is the sponsor and administrator of four multiemployer pension plans; the National, New England, Mid Atlantic, and Philadelphia Pension Plans. n1 The National, New England and Mid Atlantic Plans (the Plans) are each independent legal entities. Each plan has its own tax identification number, plan benefits, summary plan description, actuarial valuation, and files its own Form 5500. The assets of each plan are used only to pay the benefits and expenses of such plan. n2

n1 The Philadelphia Plan will not participate in the merger.

n2 By letter dated May 17, 1989, you notified the Department that the contributing employers to the New England Plan have ceased contributing to the New England Plan and are now contributing to the National Plan.

You further represent that the Fund provides all administrative services for the Plans. Most of the Plans' assets are invested in a commingled trust and assets attributable to each plan are allocated to the plan in accordance with strict accounting principles. The Trustees of the Fund are trustees and fiduciaries of each of the multiemployer plans participating in the proposed merger. Some of the Fund's Trustees are stockholders and/or employees of contributing employers to the New England and Mid Atlantic Plans. The Fund's Trustees make all policy decisions for the Plans. The Fund Manager is responsible for the operation of the Plans on a day-to-day basis. In addition, the Amalgamated Clothing and Textile Workers Union (ACTWU) is the collective bargaining representative for all employees who participate in the Plans.

Each of the Plans has a different level of funding. The National Plan has assets well in excess of vested benefits. The New England Plan has assets slightly in excess of vested benefits. The Mid Atlantic Plan has less assets than vested benefits. n3

n3 As of October 1, 1988, the Mid Atlantic Plan had unfunded vested benefits in the amount of $18,285,000.

You state that the Trustees of the Fund propose to merge the New England and Mid Atlantic Plans into the National Plan. Under the terms of the proposed merger, participants in each of the Plans will maintain all benefits accrued to the date of the merger. Immediately subsequent to the merger, all participants in the merged National Plan will earn future benefits at the present National Plan formula. Individuals who participated in the National Plan prior to the merger will continue to earn past and future benefits in accordance with the formula used to calculate benefits in the National Plan which was in effect prior to the merger.

The merger proposal contains four elements designed to reduce the Mid Atlantic Plan's pre-merger unfunded liabilities. First, contributing employers to the New England and Mid Atlantic Plans will enter the merged National Plan with a "withdrawal liability" account balance equal to the amount of unfunded vested benefits allocable to them by the plan to which they contributed prior to the merger. n4 Contributing employers to the National Plan will maintain their "withdrawal liability" account balances as calculated under the National Plan's modified direct attribution withdrawal liability method. Since the merged National Plan will maintain the National Plan's method of calculating withdrawal liability, the former contributing employers to the Mid Atlantic Plan (the only plan which has unfunded vested benefits) will have the ultimate responsibility for paying the unfunded vested benefits attributable to the Mid Atlantic Plan. This liability will be terminated if the merged National Plan has no unfunded vested benefits at the conclusion of five years after the merger.

n4 You indicate that the merger proposal calls for an assessment of withdrawal liability pursuant to individual employer contracts. It was represented that such assessment is outside of the provisions of Title IV of ERISA because the merged National Plan will be fully funded.

Second, effective September 1987, the contributing employers to the Mid Atlantic Plan increased their contributions from $57 per participant per month to $90 per participant per month. The merger proposal calls for continued contributions at this rate for at least five years. In each year, the first $1 million of contributions from former Mid Atlantic employers will be allocated to reduce the existing unfunded liability. Third, the balance of the contributions, after the first $1 million is allocated to the existing unfunded liability, will be used to provide future service benefits under the National Plan formula. Under the merged National Plan, former Mid Atlantic Plan employees will be provided past service benefits in accordance with amounts accrued under the former Mid Atlantic Plan. It is represented, therefore, that the balance of such contributions will exceed the amount required (on an actuarial basis) to provide future service-only benefits. This excess amount will also be used to offset the Mid Atlantic Plan's pre-merger unfunded vested benefits.

Fourth, as a condition precedent to the merger, the ACTWU and contributing employers to the Mid Atlantic Plan will transfer a lump sum of $6 million to the Mid Atlantic Plan. The collective bargaining parties will obtain this money by terminating the Dyers Vacation and Welfare Fund (the Dyers Fund) and contributing $6 million of the Dyers Fund's assets in excess of the assets necessary to satisfy all of the Dyers Fund's liabilities to the Mid Atlantic Plan. n5 You have stated that the termination will comply with section 403(d)(2) of ERISA.

n5 All of the Dyer's Fund participants are also participants in the Mid Atlantic Plan.

You have represented that the total of the amounts transferred to the merged National Plan pursuant to the above provisions will be less than 100% of the Mid Atlantic Plan's unfunded vested benefits as of October 1, 1988. However, the Fund's actuary estimates that, if the merger occurs in accordance with the Trustees' proposal, the merged National Plan will have assets slightly in excess of vested benefits.

Finally, you have represented that the proposed merger will satisfy all of the merger requirements for mergers of multiemployer plans set forth in section 4231 of ERISA and regulations promulgated thereunder by the Pension Benefit Guaranty Corporation (PBGC). As a condition precedent to the merger, the Fund will obtain a favorable compliance determination from the PBGC.

You have requested an advisory opinion that:

(1) The proposed merger would not violate sections 403©(1) and 404(a)(1) of ERISA; and

(2) The proposed merger would not constitute a prohibited transaction under section 406 of ERISA.

Section 403©(1) of ERISA provides, in part, that the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.

Section 404(a)(1) of ERISA similarly requires that fiduciaries of a plan discharge their duties solely in the interest of the participants and beneficiaries of the plan, and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable plan administration expenses.

Section 406(a)(1)(D) of ERISA provides that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction if he knows or should know that such transaction constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan.

Sections 406(B)(1) and 406(B)(2) of ERISA provide that a fiduciary with respect to a plan shall not deal with the assets of the plan in his own interest or for his own account or in his individual capacity or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party)whose interests are adverse to the interests of the plan or the interests of the participants or beneficiaries.

Section 408(B)(11) of ERISA provides that the prohibitions of section 406 shall not apply to a merger of multiemployer plans, or the transfer of assets or liabilities between multiemployer plans, determined by the PBGC to meet the requirements of section 4231 of ERISA. Section 408(f) provides that section 406(B)(2) shall not apply to any merger described in subsection (B)(11).

Finally, section 4231© of ERISA provides that the merger of multiemployer plans or the transfer of assets or liabilities between multiemployer plans shall be deemed not to constitute a violation of the provisions of section 406(a) or section 406(B)(2) if the PBGC determines that the merger or transfer otherwise satisfies the requirements of this section. n6

n6 Section 4231 is contained within Title IV of ERISA which is within the sole jurisdiction of the PBGC.

In discussing section 4231 of ERISA, Congress noted in the legislative history accompanying the Multiemployer Pension Plan Amendments of 1980 Act that:

The rules regarding mergers and transfers are designed to allow mergers in all cases where the resulting plan will not be expected to be in financial trouble. This facilitates the committee's purpose of encouraging mergers which expand a plan's contribution base to provide greater stability by looking at the prospects for the resulting plan instead of focusing on the narrow mechanical test provided under current law. The committee believes that a merger which complies with the conditions will generally be in the best interest of plan participants.

House Comm. on Education and Labor, H.R. Rep. No. 869, 96th Cong., 2nd Sess. 87 reprinted in [1980] U.S. Code Cong. & Ad. News 2918, 2955.

Issue 1

The provisions of Title I of ERISA do not expressly prohibit or limit mergers of multiemployer pension plans. In the Department's view, whether a proposed merger of multiemployer pension plans complies with the provisions of sections 403©(1) and 404(a)(1) of ERISA can only be determined by the appropriate plan fiduciaries based on all relevant facts and circumstances. Based on the statutory framework and the Congressional intent described above, it is the opinion of the Department that, in determining the propriety of a merger of multiemployer pension plans, the fiduciaries of each multiemployer plan must make their determinations under sections 403© and 404(a)(1) by reference to the multiemployer plan resulting from the proposed merger. In making such determinations, the fiduciaries must consider the funded status of the resulting merged plan, as well as the long-term financial viability of such plan. n7 In this regard, it is contemplated that the fiduciaries would, among other things, take into account the economic outlook of the industry, demographics of the resultant participant population, current and anticipated contribution rates and administrative expenses. The fiduciaries should be aware that compliance with the requirements of section 4231, as determined by the PBGC, will not, in and of itself, satisfy the fiduciaries' obligations under sections 403© and 404(a)(1) of ERISA. n8 Accordingly, the Department expects that the fiduciaries will make independent determinations taking into account all relevant information pertaining to the proposed merger.

n7 In the instant case, we note that the trustees may wish to consider, among other things, actuarial projections made of assets and accrued and vested liabilities for the merged plan under a variety of alternate scenarios.

n8 This analysis of fiduciary duties under sections 403 and 404 of ERISA is limited strictly to instances of multiemployer pension plan mergers.

Issue 2

You represent that, as a condition precedent to the merger, the Fund will obtain a favorable compliance determination under section 4231 of ERISA from the PBGC. Therefore, it is unnecessary for the Department to address the issues raised under section 406(a) and 406(B)(2) by the proposed merger.

Whether the proposed merger is prohibited by the provisions of section 406(B)(1) of ERISA involves questions of a factual nature which can only be answered by the Trustees based on all of the relevant facts and circumstances.

This letter is an advisory opinion under ERISA Procedure 76-1. Section 10 of the procedure describes the effect of an advisory opinion.

Robert J. Doyle

Director of Regulations and Interpretations

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  • 2 weeks later...

On the assumption that what is being asked of the trustees is to determine if the two employer plans should be merged into the healthy plan, then yes, the trustees have a fiduciary duty to act in the best interest of the plan and its participants. The DOL would take a dim view of trustees compromising the financial integrity of a plan to merge a poorly funded plan into it. On the other hand, the two employers could freeze future accruals in their plans and come in as new employers to the healthy plan. They could continue funding their plans as needed. Depending upon the funding disparity, the employers could also merge their two plans into the other plan and agree to a higher contributions to take care of the difference.

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Would your answer be the same if an employer who sponsored a well funded single employer plan acquired another employer who sponosred a plan that was poorly funded and decided to merge the two?

I think the first question is whether the merger is a fiduciary function. DOL in the 1989 opinion letter stated that it was but then stated that: "This analysis of fiduciary duties under sections 403 and 404 of ERISA is limited strictly to instances of multiemployer pension plan mergers" I think this reference acknowledged that for single employer plans, merger would not be a fiduciary function. I believe that in 1989 DOL was acting upon the notion that multiemployer plan trustees, when acting as trustees, are always performing fiduciary functions even if the function would be a "settlor" function in the single employer world.

I am not sure that DOL's opinion would be the same today in light of FAB 2002-2.

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I would agree that the merger of single employer plans is a different ball game when examining fiduciary responsibilities. The single employer is generally performing a settlor function, but I believe that DOL Opinion Letter 89-29A is still a very valuable document. That merger was prompted by discussions at the Trustee table, as opposed to a mandate in a collective bargaining agreement/s to merge. If the parties to a collective bargaining agreement mandated merger and the Trustees were instructed to complete it, their fiduciary duties would be limited to the administration of implementing that settlor decision.

One of the significant parts of FAB 2002-2 was the second to the last paragraph in which the Department stated:

“It is also the view of this office that, consistent with the Plan expense guidance discussed above, it would not be appropriate for a multi-employer plan to pay for expenses attendant to activities that a multi-employer plan trustee carries out in a settlor capacity.”

Many multi-employer plans do not have a source of revenue to pay for settlor functions. For example, in many instances, there is not an employer association that can pick up the bill to analyze whether a merger would be appropriate. In many cases, unions do not have adequate resources to pay for those consulting services. I recently had a case in which two multi-employer plans were proposed to be merged into a larger plan. The first thing we did was amend the trust agreement to make it clear that such a merger would be a fiduciary decision on the part of the Trustees. The good news is that it is a fiduciary function, and therefore the plan can pay for the consultant’s expenses. The bad news is that it is a fiduciary decision and the trustees have a fiduciary responsibility to act accordingly.

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I agree with your analysis and that it would depend on the langauge of the Trust.

I frankly was surprised when I heard that many (most?) multis took the step of amending their trust documents to make what would otherwise be settlor functions into fiduciary functions. I understand the expenses question. However, there are a number of plan design issues that are in the interest of both management and the union--especially with regard to non-union employment-- where the trustees would be immune from fiduciary attack if they did not "opt in" to fiduciary coverage. I guess on the expenses there would be 302 issues to negotiate a contribution "oustide" the trust to pay for these expenses, but I haven't given that a good deal of thought.

Of course I am sure that the fact that the service providers wanted to make sure that they could get paid by the people who orignially retained them from a very solvent entity (the trust) did not factor into any analysis one way or another. :D

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