As I mentioned in a prior blog, in Coulter v. Morgan Stanley & Co. the Second Circuit held that the decision to contribute employer stock rather than cash to a benefit plan was a settlor function, not a fiduciary function. This settlor/fiduciary distinction is critical to the foundation of ERISA and the future of employer-sponsored plans.
The United States Supreme Court’s Dudenhoeffer decision shortly after that surprised me because the Supreme Court has repeatedly made this point about the distinction between settlor and fiduciary functions. As explained in more detail in a prior blog, it seems like the decision to establish an ESOP to invest primarily in employer securities is a settlor function: plan design. But the Court treated the investment in employer securities as a fiduciary function.
ERISA fiduciary functions are important, in the right context. But when we fail to establish boundaries between settlor and fiduciary functions, we create untenable situations fraught with conflicts of interest. How can I design a plan to be invested primarily in employer securities if I also have to consider every day whether to blow it up? Did Congress really intend for an ESOP to be just another investment option, or was it intending to make an ESOP a matter of plan design?
Congress, there are a lot of employee-owned businesses out there and we need some help on this one. We just need a few words to clarify that holding employer stock in an ESOP is a settlor function: plan design. Yes, this would kill off a lot of litigation, which means it is probably not in my own best interests to advocate for this. But it would allow businesses and their employees to get back to work. Privately held companies could keep giving their employees ownership without worrying every day about whether they have to sell themselves and watch their folks get laid off in the process. Publicly held companies could stop worrying about whether they have to panic the market and drive down stock prices by selling off their own stock. And an employee of a publicly held employer could make her own decisions about whether or not to invest in her employer’s stock. It almost seems too easy.