Settlor Functions

Apparently, the term "settlor functions" has been known to appear on the Series 65/66 exams, so let's take a brief look at this concept. As you know, ERISA says that pension funds and 401(k) plans are run by "fiduciaries" such as the CEO, investment advisers managing the assets, members of the board who oversee the plan, etc. But, the CEO is a fiduciary only when he's managing the plan or directing the investment advisers, for example. He's not a fiduciary to the plan participants and beneficiaries just because he's the CEO. It's the function, not the title, that makes him a fiduciary. So, when a plan fiduciary is actually just making "business decisions," called "settlor functions" by ERISA, he/she is not performing fiduciary functions. I'm looking at a letter from the Department of Labor, in which the Assistant Secretary of the Department explains that "in light of the voluntary nature of the private pension system governed by ERISA, the Department has concluded that there is a class of discretionary activities which relate to the formation, rather than the management, of plans. These so-called 'settlor functions' include decisions relating to the establishment, termination and design of plans and are not fiduciary activities . . . "

So, the decision to start or terminate a retirement plan is considered a business decision (settlor function), not a fiduciary matter. The exam might expect you to know that the following decisions are considered "settlor functions" and not fiduciary activities:

--Choosing the type of plan or options in the plan

--Amending the plan

--Requiring employee contributions/changing contribution levels

--Terminating a plan

I'll have to think up some practice questions for future posts. With any luck the exams won't go very deep into this topic. I'm still struggling to understand why investment adviser representatives actually need to know anything about this topic. As if relevance actually played a role in placing a question on the Series 65/66.