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Trust Examination Manual

Appendix E — Employee Benefit Law  

E R I S A

Section-by-Section Interpretations

Regulations, Advisory Opinions, Court Cases, Opinion Letters,

and Class Exemptions

Abbreviations Used

AO          Advisory Opinion (Department of Labor)

DOL         Department of Labor

ERISA     Employee Retirement Security Act of 1974

FR             Federal Register

PTE          Prohibited Transaction Exemption

PLR          Private Letter Ruling

WPPDA Welfare and Pension Plans Disclosure Act

WSB        Washington Service Bureau

10-27-94

Definitions

ERISA Section 3

 

ERISA Section 3(14)

"Party in Interest"

The term "party in interest" means, as to an employee benefit plan -
(A) Any fiduciary (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such employee benefit plan;
(B) A person providing services to such plan;
(C) An employer any of whose employees are covered by such plan;
(D) An employee organization any of whose members are covered by such plan;
(E) An owner, direct or indirect, of 50% or more of -
  (i) The combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation,
  (ii) The capital interest or the profits interest of a partnership, or
  (iii) The beneficial interest of a trust or unincorporated enterprise, which is the employer or an employee organization described in subparagraph (C) or (D);
(F) A relative (as defined in paragraph (15)) of any individual described in subparagraph (A), (B), (C), or (E);
(G) A corporation, partnership, or trust or estate of which (or in which) 50% or more of -
  (i) The combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation,
  (ii) The capital interest or the profits interest of a partnership, or
  (iii) The beneficial interest of a such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C) (D), or (E);
(H) An employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors, or a 10% or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D), (E), or (G), or of the employee benefit plan; or
(I) A 10% or more (directly or indirectly in capital or profits) partner or joint venture of a person described in subparagraph (B), (C), (D), (E) or (G). The Secretary, after consultation and coordination with the Secretary of the Treasury, may by regulation prescribe a percentage lower than 50%, for subparagraph (E) and (G) and lower than 10% for subparagraph (H) or (I). The Secretary may prescribe regulations for determining the ownership (direct or indirect) of profits and beneficial interests, and the manner in which indirect stock holdings are taken into account. Any person who is a party in interest with respect to a plan to which a trust described in Section 501(c)(22) of the Internal Revenue Code of 1954 is permitted to make payments under Section 4223 shall be treated as a party in interest with respect to such trust.
  1. Conference Report
  2. See the discussion of the term "party in interest" at page 323 of the Congressional Conference Report.

  3. Prohibited Transaction Class Exemptions (PTE)
    1. [Plans] Two or more multi-employer plans or multiple employer plans are not parties in interest or disqualified persons with respect to each other merely because they are maintained by the same plan sponsors. However, a multi-employer plan or a multiple employer plan may be a party in interest or a disqualified person with respect to another multiemployer plan or multiple employer plan for other reasons (for example, one plan providing services to another). Final PTE 76-1; AO 77-47.
  1. Advisory Opinions
    1. [Affiliates] A corporation 50% or more of which is owned by a more than 50% shareholder of the employer maintaining the plan is a party in interest. Proposed PTE I-492.
    2. [Banks] A savings and loan association is not a party in interest merely because plan assets are held on deposit. AO 77-11; AO 79-10.
    3. [Broker-Dealers] Broker-dealers who execute securities transactions for plans are parties in interest. AO 76-76.
    4. [Custodians] Custodians of plan assets are parties in interest. AO 76-76; PLR 7907091.
    5. [Employer] Employers are parties in interest. WSB 77-14; PLR 7847034. Directors of an employer are parties in interest. WSB 77-14. An employer council is a party in interest because it acts on behalf of employers. AO 76-103.
    6. [Employer] An employer of employees covered by the plan is a party in interest pursuant to ERISA Section 3(14)(C) even if it is merely an affiliate or subsidiary of the employer plan sponsor. Thus, absent a statutory or administrative exemption, the exchange of common stock for preferred stock and the cancellation of a note in connection therewith as a transaction between the affiliate corporation and the plan would constitute a prohibited transaction under Section 406(a)(1)(A). AO 81-34A.
    7. [Insurance Companies] Insurance companies are not parties in interest merely because they issue group insurance policies to plans. AO 76-36.
    8. [Mergers & Acquisitions] A corporation proposes to acquire all of an unrelated third party's assets. In connection therewith, the, acquiring corporation will not assume, adopt or maintain the existing plan of the corporation to be acquired. The acquiring corporation desires to purchase or lease a building owned by the plan. Certain employees of the acquired corporation will become employees of the acquiring corporation. The term party in interest includes in Subsection (c) an employer any of whose employees are covered by the plan. However, the definition of an employer under Section 3(14)(C) must be viewed in light of the overall statutory framework of ERISA, including Section 3(5). That section provides in relevant part that the term "employer" means any person acting directly as an employer or indirectly in the interest of an employer in relation to an employee benefit plan. Since the acquiring corporation had no relationship with the plan in the past and will not assume, maintain or adopt the plan or its accompanying trust after the acquisition, that entity is not a Section 3(14)(C) "party in interest" to the plan upon its acquisition of substantially all of the plan sponsor's assets. Advisory Opinion 81-78A.
    9. [Ownership] A person is not a 50% owner of a corporation or partnership under Section 3(14)(G) if such 50% ownership interest will not be acquired until sometime in the future. AO 75-147; AO 77-83.
    10. [Partners] Section 3(14)(I) applies only to 10% partners in a party in interest, not 10% partners with a party in interest in a partnership that is not itself a party in interest. AO 75-147; AO 77-83.
    11. [Relatives] Relatives are parties in interest. AO 75-137.
    12. [Service Providers] Service providers are parties in interest even if they receive no compensation from the plan. WSB 78-17. However, a person who only provides services to the employer before the plan is established is not a party in interest. AO 76-65.
    13. [Trustees] Trustees of a plan and employees of a trustee are parties in interest. AO 77-84.
    14. [Unions] Unions are parties in interest. AO 76-91; WSB 78-25. Employees of a union are parties in interest. AO 76-91. However, the mere fact that union officers are also directors and employees of a corporation does not make such corporation a party in interest. AO 76-120.
  1. Court Decisions
    1. Trustees of a pension or welfare plan are parties in interest to the plan under Section 3(14)(A). Marshall v. Snyder, 430 F. Supp. 1224 (E.D.N.Y. 1977), aff'd in part, 572 F.2d 894 (2d Cir. 1978).
    2. Trustees and fiduciaries of employee benefit plans are parties in interest within the meaning of ERISA Section 3(14)(A). Donovan v. Bryans, 566 F. Supp. 1258, 4 EBC 1772 (E.D.Pa. 1983). A party in interest as defined by ERISA Section 3(14) includes any fiduciary and any employer of employees covered by an employee benefit plan. Brock v. Gilliken, 677 F. Supp. 398, 9 EBC 1803 (E.D.N.Y. 1987).
    3. In an action by terminated employee claiming applicability of retroactive amendment in employee stock ownership plan, under ERISA Section 3(14) a party in interest includes the employer and its officers, directors and major stockholders. Allen v. The Katz Agency, Inc. Employee Stock Ownership Plan, 677 F.2d 193, 3 EBC 1352 (2d Cir. 1982).
    4. A construction company is deemed a party in interest under Section 3(14)(G) when its sole stock owner and president is the trustee of an employee benefit plan and the company receives loans from such plan. Brock v. Gilliken, 677 F. Supp. 398, 9 EBC 1803 (E.D.N.Y. 1987).
    5. A law firm that receives excessive amounts of money in relationship to services rendered by the firm and benefits received by the members of the represented employee welfare plan is treated as a party in interest in an action alleging the trustees breached their fiduciary duties by overpaying the law firm. Benvenuto v. Schneider 678 F. Supp. 51, 9 EBC 1528 (E.D.N.Y. 1988).

Section 3(15)

"Relative"

The term "relative" means a spouse, ancestor, lineal descendant, or spouse of a lineal descendant.
  1. Conference Report
  2. The Congressional Conference Report does not discuss the term "relative."

  3. Advisory Opinions
    1. The brother of a fiduciary is not a relative under Section 3(15) and, therefore, is not a party in interest under Section 3(14)(F). AO 77-05.

Section 3(18)

"Adequate Consideration"

The term "adequate consideration" when used in part 4 of subtitle B means:
(A) In the case of a security for which there is a generally recognized market, either
  (i) The price of the security prevailing on a national securities exchange which is registered under section 6 of the Securities Exchange Act of 1934, or
  (ii) If the security is not traded on such a national securities exchange, a price not less favorable to the plan than the offering price for the security as established by the current bid and asked prices quoted by persons independent of the issuer and of any party in interest; and
(B) In the case of an asset other than a security for which there is a generally recognized market, the market value of the asset as determined in good faith by the trustee or named fiduciary, pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary [of Labor].
  1. Conference Report
  2. The Congressional Conference Report does not discuss the definition of the term "adequate consideration."

  3. Regulations
  4. DOL ERISA Regulation 2510.3-18(b) was proposed in 1988 but has not yet been adopted. It provided guidance on how thinly-traded securities should be valued.

  5. Advisory Opinions
    1. In the absence of regulations under Section 3(18), securities for which there is no generally recognized market should be valued by the trustees or other appropriate plan fiduciary by making a good faith determination of the fair market value of the securities, utilizing recognized methods of determining value. AO 75-141; AO 76-16.
    2. If securities are publicly traded in the over-the-counter market and if there are current bid and asked prices quoted by persons independent of the issuer and of any party in interest, a plan may not purchase a controlling block of stock at a price greater than such current bid and asked prices. AO 76-52.
    3. Reliance by a plan trustee on a ruling received from the IRS that a method of determining the fair market value of book value shares constitutes a reasonable method of determining fair market value for purposes of Treasury Regulation 1.421-7(e)(2) would be considered evidence that the trustee's determination of fair market value was made in good faith for purposes of Section 3(18)(B). AO 77-35.
  1. Court Decisions
    1. [ESOP - Stock Valuation] Where an ESOP purchases securities from a sponsoring company that does not have a generally recognized market, adequate consideration as defined in ERISA requires the trustee to exercise objective good faith by prudently using sound business principles of evaluation for the sole benefit of the employees' plan. Trustees who relied on appraisals that were 13 and 20 months old did not exercise good faith and sound business principles, and the amount paid for the securities purchased by the plan was more than adequate consideration. Donovan v. Cunningham, 716 F.2d 1455, 4 EBC 2329 (5th Cir. 1983).
    2. Adequate consideration is the price for the stock quoted on the American Stock Exchange. The fact that a sale of the stock over a longer period of time might have resulted in a higher return or that a premium might have been obtained for the sale of a large block need not be taken into account. Leonard v. Drug Fair, Inc., No. 78-1335, Fed. Sec. L. Rep. (CCH) 97,144 (D.D.C. 1979).
 

Section 3(21)

"Fiduciary"

Except as otherwise provided in subparagraph (B), a person is a fiduciary with respect to a plan to the extent
(i) He exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,
(ii) He renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or
(iii) He has any discretionary authority or discretionary responsibility in the administration of such plan.
Such term includes any person designated under section 405(c)(1)(B).
  1. Conference Report
  2. See the discussion of the term "fiduciary" at page 323 of the Congressional Conference Report.

  3. Regulations
    1. Refer to DOL Regulation 2510.3-21 and IRS Regulation 54.4975-9.
    2. The regulation clarifies the applicability of the definition fiduciary to persons who provide investment advice to plans and to securities brokers and dealers who execute securities transactions for plans. DOL Regulation 2510.3-21(c)-(e).
    3. A person is a fiduciary only to the extent of his or her fiduciary responsibilities to a plan. DOL Regulation 2510.3-21(c)(2), (d)(2).
    4. As a general matter, a person (e.g., a securities broker) is not a fiduciary to a plan if he or she does not know, and has no reason to know, that he or she is acting for a plan. Preamble to DOL Regulation 2510.3-21(c)-(e).
    5. A fee or other compensation, direct or indirect, for the rendering of investment advice to a plan, within the meaning of Section 3(21)(A)(ii), should be deemed to include all fees or other compensation incident to the transaction in which the investment advice to the plan has been rendered or will be rendered. This may include, for example, brokerage commissions, mutual fund sales commissions and insurance sales commissions. Preamble to DOL ERISA Regulation 2510.3-21(c)-(e).
    6. Depending on the facts and circumstances, a sales presentation and recommendations made to a plan fiduciary by an insurance agent or broker, pension consultant or mutual fund principal underwriter in connection with insurance or annuity contracts or mutual funds may constitute investment advice under Section 3(21). Preamble to DOL ERISA Regulation 2510.3-21(c)-(e).
    7. A person who exercises discretion in the administration of a plan by making final decisions on appeals from claim denials is a fiduciary to the plan under Section 3(21)(A)(iii) even if the plan documents fail to state do the person is a named fiduciary or merely a fiduciary. Preamble to DOL ERISA Regulation 2560.503-1 (Claims Procedure).
  1. Interpretive Bulletins
    1. [Trustees] A plan trustee and a plan administrator are plan fiduciaries because of the nature of their functions for a plan. IB 75-8, Question D-3.
    2. People who perform purely ministerial functions for a plan within a framework of policies, interpretations, rules, practices and procedures made by others are not fiduciaries under Section 3(21). IB 75-8, Question D-2. This question contains examples of purely ministerial functions.
    3. An officer, director, or employee of an employer maintaining a plan will not be a fiduciary for the plan, unless he or she has or exercises any of the authority, responsibility or control described in Section 3(21)(A) or provides investment advice to the plan for a fee or other compensation. IB 75-8, Questions D-4 and D-5.
    4. An attorney, accountant, actuary, or consultant for a plan who neither exercises nor has any of the responsibilities, authority or control described in Section 3(21)(A), and who does not provide investment advice to the plan for a fee or other compensation, is not a fiduciary to the plan under Section 3(21). IB 75-5, Question D-1.
    5. A person who merely calculates the amount of benefits to which a participant is entitled in accordance with a formula contained in a plan document is not a fiduciary under Section 3(21). However, a person who has the final authority to authorize or disallow claims for benefits based on an interpretation of plan provisions relating to eligibility for benefits would be a fiduciary under Section 3(21). IB 75-8, Question D-3.
  1. Prohibited Transaction Class Exemptions (PTE)
    1. [Broker-Dealers] Where a broker-dealer acts as an investment adviser in recommending securities transactions and a second fiduciary decides whether each such transaction should be entered into, the broker-dealer may be a fiduciary by reason of providing investment advice within the meaning of ERISA Section 3(21)(A)(ii) and Code Section 4975(e)(3)(B). However, since he or she would not have the power to manage, acquire, or dispose of plan assets without the approval of the second fiduciary, he or she would not be an investment manager as that term is defined in ERISA Section 3(38). Final PTE C 78-10.
    2. [Investment Advisor] A person may be a fiduciary by reason of being an investment adviser even if such person does not exercise investment discretion as that term is defined by the Securities and Exchange Commission under Section 3(a)(35) of the Securities Exchange Act of 1934. Final PTE C 78-10.
  1. Advisory Opinions
    1. The term "investment discretion" is defined in Section 3(a)(35) of the Securities Exchange Act of 1934. In general, a person who exercises investment discretion for a plan under that definition would also be a fiduciary with respect to the plan as defined in Section 3(21) of ERISA and Section 4975(e)(3) of the Code. A person also would also be a fiduciary as the result of rendering investment advice for compensation to a plan. Proposed Extension of Paragraph I(a) of PTE C 75-1.
    2. [Banks] The mere fact that a plan invests in a savings account or certificate of deposit of a savings and loan association does not make the association a plan fiduciary. AO 77-11; AO 79-10.
    3. [Custodians] A custodian of plan assets who has no discretionary authority or control over the management of the plan or the disposition of the assets, and who does not provide investment advice to the plan, is not a fiduciary under Section 3(21)(A). PLR 7907091.
    4. [Insurance Companies] An insurance company maintaining a separate account in which a plan invests is a fiduciary to the plan. Proposed PTE C 78-19.
    5. [Investments] A partnership in which a plan has invested does not become a plan fiduciary merely by reason of such investment. WSB 78-17.
    6. [Plan Committee Members] The individuals serving on one investment committee of a plan with responsibility for managing plan assets and appointing investment managers for the plan are fiduciaries under Section 3(21)(A). AO 76-15.
    7. [Trust Department Staff] A person who merely makes a report to plan fiduciaries on a plan's asset management staff and serves on a committee that advises Plan fiduciaries on plan investment policies and objectives will not be a plan fiduciary under Section 3(21)(A) or ERISA Regulations Section 2510.3-21. AO 77-68.
    8. The advice and recommendations made to plans and plan fiduciaries by insurance agents and brokers, pension consultants and mutual fund principal underwriters (or their employees) regarding plan purchases of insurance contacts or annuities or mutual fund shares constitutes advice as to the value of securities or other property or recommendations as to the advisability of investing in, purchasing or selling securities or other property and could constitute investment advice so as to classify the persons who furnish such advice as fiduciaries if it is rendered under certain circumstances. Proposed PTE C 77-9; WSB 79-99.
  1. Court Decisions
    1. [General] The definition of fiduciary under ERISA Section 3(21) is to be broadly construed. Thus, fiduciary should be defined not only by reference to particular titles, such as trustee, but also by considering the authority that a particular person has or exercises over an employee benefit plan. Donovan v. Mercer, 747 F.2d 304, 5 EBC 2512 (5th Cir. 1984).
    2. [General] ERISA fiduciary status is determined by focusing on the function performed by the individual rather than on the individual's title; an accounting firm was a fiduciary to the extent that it controlled whether or not contributions were returned to plan participants. Blan v. Marshall and Lasserman, 812 F.2d 810, 8 EBC 1495 (2d Cir. 1987).
    3. [General] Because the terms of an employee benefit plan conferred authority on defendants to exercise discretion in the management of the plan and its assets, the defendants were fiduciaries as defined by ERISA Section 3(21). Donovan v. Bryans, 566 F. Supp. 1258, 4 EBC 1772 (E.D.Pa. 1983).
    4. [General] ERISA permits the named plan fiduciary the option of delegating the responsibility of investing plan assets to a professional investment adviser who then might assume the ERISA fiduciary obligations to the plan, including the duties of care and loyalty. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 8 EBC 2457 (2d Cir. 987).
    5. [General] A fiduciary continues in his status as such absent any clear resignation or removal under permissible circumstances. Marshall v. Dekeyser, 485 F.Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
    6. [General] ERISA Section 3(21)(A) limits the scope of both fiduciary status and responsibility; a person is a fiduciary with only for those aspects of the plan over which he or she exercises control or authority, and his or her fiduciary duty extends solely to those functions. Jury instructions should delineate the requisite control necessary to consider a person a fiduciary and warn jurors against drawing inferences of control or authority merely from a person's status, including status as a former employer, an officer, a principal shareholder or a director. Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456, 7 EBC 1782 (5th Cir. 1986), cert. denied, 479 U.S. 1089 (1987).
    7. [General] Under ERISA Section 3(21), a person is a fiduciary to a plan to the extent that he or she has any discretionary authority or discretionary responsibility in the administration of such plan. A duty to report "difficulties" concerning borrowers interest payments includes authority, responsibility and discretion to determine what constitutes difficulties. One who is conferred such authority is a fiduciary as defined by ERISA Section 3(21). Davidson v. Cook, 567 F.Supp. 225, 4 EBC 1816 (E.D.Va. 1983), aff'd, 734 F.2d 10 (4th Cir. 1984).
    8. [Attorneys] Attorneys who counsel a plan sponsor, members of a plan investment committee, and stockbrokers or dealers who recommend certain securities and then participate in the purchase or sale of the securities and receive a commission for their services, may be plan fiduciaries by reason of providing investment advice for a fee or other compensation. Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978).
    9. [Broker-Dealer] A stockbroker is a fiduciary as defined by ERISA when, without authorization, he invests the assets of an employee benefit plan in unsuitable, highly speculative securities and disregards the trustee's instructions to liquidate. Metzner v. D. H. Blair & Co., Inc., 663 F. Supp. 716, Fed. Sec. L. Rep. (CCH) 993,306, 8 EBC 2159 (S.D.N.Y. 1987).
    10. [Custodians] A plan custodian can be a fiduciary, but only if the custodian possesses the requisite discretionary authority and discretionary control required by Section 3(21). The parenthetical language after "any fiduciary" in Section 3(14)(A) does not expand upon persons who are fiduciaries. A person is only a fiduciary under Section 3(14)(A) if such person is a fiduciary under Section 3(21). The Hibernia Bank v. International Brotherhood of Teamsters, Chauffeurs, Warehouseman and Helpers of America, 411 F.Supp. 478 (N.D.Cal. 1976).
    11. [Insurance Agent] An insurance agent, who was solely responsible for formulating the specifications of an employee plan, represents himself as the administrator of the plan and subsequently gives investment advice regarding such plan, even though he was never formally appointed as plan administrator nor paid a fee for his services, is deemed a fiduciary as defined by Section 3(21)(A). Applying the agency theory of apparent authority, the insurance company, as the principal of the insurance agent, is designated a fiduciary as well. Miller v. Lay Trucking C&, Inc, 606 F. Supp 1326 (N.D.Ind. 1985).
    12. [Insurance Companies] Congress did not want to make an insurance company that sells a standard annuity contract - one that provides "benefits the amount of which is guaranteed by the insurer" -- a fiduciary toward the contract's purchaser. However, where pension trustees did not buy an insurance contract with a fixed payment but turned over the assets of the pension plan to an insurance company to manage with full investment discretion, subject only to a modest income guarantee, that company was a fiduciary as defined in Section 3(21) of ERISA. Amato v. Western Union International, Inc., 596 F. Supp. 963, 5 EBC 2718 (S.D.N.Y. 1984), aff'd in part and rev'd in part, 773 F.2d 1402 (2d Cir. 1985).
    13. [Mergers & Acquisitions] An individual acted as a plan fiduciary when he recommended, designed, and implemented an amendment to a profit-sharing plan that changed the plan to an ESOP and required the plan to invest large sums of money in employer stock so as to enable the individual to acquire control of the employer. Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978).
    14. [Plan Administrator] By the very nature of his position, a plan administrator is a fiduciary to the plan. Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
    15. [Plan Sponsor] Officers and directors of a plan sponsor are plan fiduciaries if they exercise control through the selection of the investment committee, administrative committee or plan officers or directors. Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978); Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
    16. [Plan Sponsor] An employer, whose only control over the management of the employee welfare plan is its authority to appoint, retain and remove the plan's administrator, is only a fiduciary for these acts and not for any others. Independent Association of Publishers' Employees, Inc. v. Dow Jones & Co., Inc., 671 F Supp. 1365 (S.D.N.Y. 1987).
    17. [Plan Sponsor] An employer is a fiduciary to a plan only when and to the extent that it engages in activities governed by ERISA, including acing in the capacity of plan administrator. Amato v. Western Union International, Inc., 773 F.2d 1402, 6 EBC 2226 (2d Cir. 1985), cert. dismissed, 474 U.S. 1113 (1986). Contra Ashenbaugh v. Crucible, Inc., 854 F.2d 1516, 9 EBC 2560 (3d Cir. 1988).
    18. [Plan Sponsor] An employer that is also a plan administrator of a plan has assumed two distinct statuses. ERISA's fiduciary duty attaches when the employer/administrator performs the function of a plan administrator but not when it acts in the capacity of an employer. When renegotiating a welfare benefit plan or benefits not vesting under ERISA the employer/administrator is acting in its employer capacity and, thus, can breach no ERISA fiduciary duty, because such fiduciary obligations do not attach to employer functions. United Independent Flight Officers, Inc. v. United Air Lines, Inc., 756 F.2d 1262, 6 EBC 1075, 6 EBC 1291, 118 L.R.R.M. (BNA) 2474,102 Lab. Cas. (CCH) 911,382 (7th Cir. 1985).
    19. [Service Provider] Where a defendant provided claims processing services to a health and welfare fund using adjustment standards established jointly by the fund and the defendant and the fund made final determinations on any contested payments according to the adjustment standards, it was not established that the defendant exercised sufficient discretionary authority or control over the fund or its assets to make it a fiduciary within the meaning of Section 3(21)(A) of ERISA. Donovan v. Robbins, 558 F. Supp. 319 (N.D.Ill. 1983), aff'd, 703 F.2d 570 (7th Cir. 1983).
    20. [Recordkeeping] A company was delegated by a bank trustee or custodian for self-directed IRA accounts the function of maintaining records and preparing appropriate reports required by Section 103 of ERISA. A company maintaining records necessary for the preparation of such reports is a plan fiduciary and must perform these functions with the degree of care set forth in Section 404(a)(1)(B). Redwood Bank v. QTA, Inc., No. C-79-1586, slip op. (N.D.Cal., Oct. 23, 1979).
    21. [Trustees] The trustees of a pension or welfare plan are fiduciaries under Section 3(21)(A). Marshall v. Snyder, 430 F. Supp. 1224 (E.D.N.Y. 1977), aff'd in part, 572 F.2d 894 (2d Cir. 1978); Marshall v. Dekeyser 485 F. Suay (29, I EBC 1898 (W.D.Wis.1979).
    22. [Trustees - Directed] Trustees who merely distribute plan assets upon direction from the plan's administrators in accordance with a court order and with no discretionary authority over the plan assets, do not exercise the required authority over a plan's assets that would impose fiduciary responsibilities. Richardson v. U.S. News & World Report, 623 F. Supp. 350 (D.D.C. 1985).
    23. [Trustees - Directed] Even though a plan trustee has no authority for investment decisions, it cannot disavow itself a responsibility for such decisions, since it is still a fiduciary. However, under the allocation provisions of Section 405(c)(1), the trustee may, in fact, not be liable for such decisions. Leonard v. Drug Fair, Inc., No. 78-1335, Fed. Sec. L. Rep. (CCH) 997,144 (D.D.C. 1979).
 

Section 3(21)(B)

Investment Company (Mutual Fund) as Fiduciary

If any money or other property of an employee benefit plan is invested in securities issued by an investment company registered under the Investment Company Act of 1940, such investment shall not by itself cause such investment company or such investment company's investment adviser or principal underwriter to be deemed to be a fiduciary or a party in interest as those terms are defined in this title, except insofar as such investment company or its investment adviser or principal underwriter acts in connection with an employee benefit plan covering employees of the investment company, the investment adviser or its principal underwriter. Nothing contained in this subparagraph shall limit the duties imposed on such investment company, investment adviser, or principal underwriter by any other law.
  1. Conference Report
  2. See coverage of this provision on pages 296-297 of the Congressional Conference Report.

  3. Interpretive Bulletins
    1. The principles of Section 3(21)(B) are restated in IB 75-3, which also states that if an investment company, its investment adviser or its principal underwriter is a fiduciary or party in interest for a reason other than the investment in the securities of the investment company, such a person remains a fiduciary or party in interest regardless of Section 3(21)(B).
 

Section 3(38)

"Investment Manager"

The term "investment manager" means any fiduciary (other than a trustee or named fiduciary, as defined in section 402(a)(2)) -
(A) Who has the power to manage, acquire, or dispose of any asset of a plan;
(B) Who is -
  (i) Registered as an investment advisor under the Investment Advisers Act of 1940;
  (ii) Is a bank, as defined in that Act; or
  (iii) Is an insurance company qualified to perform services described in subparagraph (A) under the laws of more than one State; and
(C) Has acknowledged in writing that he is a fiduciary with respect to the plan.
  1. Conference Report
  2. Page 302 of the Congressional Conference Report discusses the term investment manager.

  3. Interpretive Bulletins
    1. A person who is not registered under the Investment Advisers Act of 1940 because of an exemption from registration under that act (and who is not a bank or an insurance company) may not be an investment manager. IB 75-5, Question FR-6.
    2. A person cannot be an investment manager if his or her application for registration under the Investment Advisers Act is still pending. IB 75-5, Question FR-7.
  1. Advisory Opinions
    1. An entity is an investment manager as defined in Section 3(38) of ERISA if it meets the three tests set forth in the statute.
    2. A person can be both a named fiduciary and an investment manager provided that, as named fiduciary, such person does not have the power on behalf of the plan to appoint himself or herself or monitor his or her own performance as investment manager. AO 77-69/70.
    3. A person who is registered only as a broker-dealer under the Securities Exchange Act of 1934 cannot serve as an investment manager. AO 76-20.
  1. Court Decisions
    1. Where an investment management firm had broad powers to manage plan assets, was registered as an investment adviser under the Investment Advisers Act of 1940, and had explicitly acknowledged itself as a fiduciary to the plan in its employment contract, it is considered an investment manager as defined in ERISA, regardless of any oral modifications of the agreement. Lowen v. Tower Asset Management, Inc, 829 F.2d 1209, 8 EBC 2457 (2d Cir. 1987).
    2. Where an investment management company was not registered as an independent adviser under the Investment Advisers Act of 1940, was not a bank or insurance company, and had not acknowledged itself in writing as a fiduciary to the plan, it is not considered an investment manager as defined in ERISA. The trustee of an ESOP may not claim a defense under ERISA Section 405(d)(1). Whitfield v. Cohen, 682 F.Supp. 188, 9 EBC 1739 (S.D.N.Y 1988).

Plans Covered

ERISA Section 4

Section 4

(a) Except as provided in subsection (b) and in sections 201, 301 and 401, this title shall apply to any employee benefit plan if it is established or maintained:
  (1) By any employer engaged in commerce or in any industry or activity affecting commerce; or
  (2) By any employee organization or organizations representing employees engaged in commerce or in any industry or activity affecting commerce; or
  (3) By both.
(b) The provisions of this title shall not apply to any employee benefit plan if -
  (1) Such plan is a governmental plan (as defined in section 3(32));
  (2) Such plan is a church plan (as defined in section 3(33)) with respect to which no election has been made under section 410(d) of the Internal Revenue Code of 1954;
  (3)

(4)

(5)

Such plan is maintained solely for the purpose of complying with applicable workmen's compensation or unemployment compensation or disability insurance laws;

Such plan is maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens; or

Such plan is an excess benefit plan (as defined in section 3(30) ) and is unfunded.

  1. Conference Report

These provisions are discussed on pages 255-256 of the Congressional Conference Report.

Fiduciary Duties

ERISA Section 404

Section 404(a)(1)

Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and
(A) For the exclusive purpose of:
  (i) Providing benefits to participants and their beneficiaries, and
  (ii) Defraying reasonable expenses of administering the plan;
(B) With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
(C) By diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
(D) In accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter or subchapter III of this chapter.
  1. Conference Report
  2. All the fiduciary responsibilities imposed by Section 404(a)(1) are discussed at pages 302-305 of the Congressional Conference Report.

  3. Regulations
    1. Plan assets are defined in DOL ERISA Regulation 2510.3-101.
    2. Prudence is covered in DOL ERISA Regulation 2550.404a-1 on "Investment Duties" and the specific coverage of § 404(a)(1)(B), below.
    3. See DOL ERISA Regulation 404c-1 , which exempts fiduciaries from certain ERISA liability if plans meet certain conditions and participants direct their own investments.
  1. Interpretive Bulletins
    1. Social Investments ("Economically Targeted Investments") (ETIs). Establishes DOL’s position on permissibility of making investments which achieve a social goal in addition to a financial return. The IB indicates that ETIs are not prohibited by ERISA, and that their choice as an investment must follow DOL ERISA regulation 2550.404a-1 regarding Investment Duties, be prudent, not be a prohibited transaction, and not provide less return to a plan than a normal investment. IB 94-1.
    2. Proxy Voting. Among the fiduciary responsibilities of an investment manager are those to vote proxies for stock owned by ERISA plans. IB 94-2.
    3. Investment Policies. An investment policy designed to further the purposes of a plan and its funding policy is consistent with, but not required by, ERISA 404(a)(1)(A) and (B). IB 94-2.
  1. Advisory Opinions
    1. Pursuant to ERISA Procedure 76-1 and particularly Section 5.02(o), the Department of Labor ordinarily will not issue advisory opinions on ERISA Section 404(a). AO 80-13A.
    2. Service by a bank as trustee of a plan that has a significant portion of its assets invested in employer securities, while the bank is also a substantial secured creditor of the employer, may constitute a violation of Section 404(a)(1) by the bank. AO 76-32.
  1. Court Decisions
    1. [Effective Date] Actions by fiduciaries occurring after 1974 are not insulated from ERISA coverage merely because the roots of such action can be traced to an event prior to the effective date of ERISA. Marshall v. Craft, 463 F. Supp. 493 (N.D.Ga. 1978); Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
    2. [Exemption Applicability] Exemptions from the prohibited transaction restrictions have no effect on the basic fiduciary responsibility rules of Section 404(a)(1). Marshall v. Dekeyser, 485 F.Supp. 629, 1 EBC 1898 (W.D.Vas. 1979).
    3. [Precedent] Section 404(a)(1) codifies the common law rule that a trustee owes individual loyalty to the beneficiaries. Although trustees should carefully consider all recommendations submitted by the parties who appointed them, trustees are bound to exercise their independent judgment when making decisions in the administration of the trust. Sheet Metal Workers' International Association v. Central Florida Sheetmetal Contractors Association, 234 NLRB (CCH) No. 162 (1978).
    4. [Precedent] ERISA Section 404 essentially codified the strict fiduciary standards that trustees under Section 302 of the Labor-Management Relations Act must meet. The legislative history of ERISA demonstrates that any employee benefit fund trustee is a fiduciary whose duty to the trust beneficiaries must overcome any loyalty to the interest of the plan that appointed him. N.L.R.B. v. Amax Coal Co., 453 U.S. 322,107 L.R.R.M. (BNA) 2769, 91 Lab. Cas. (CCH) Para 12,821, 2 EBC 1489 (1981).
    5. [Bank Stock - Purchase/Retention/Sale of Fiduciary Bank/BHC Stock] The discretionary purchase, retention, or sale of the stock of the fiduciary bank is imprudent. DOL indicates that "it burdens our imagination to envision a situation in which a trustee with investment discretion could make an objective decision, solely on the basis of the prudence standard, regarding the purchase or sale of its own stock." [emphasis added] See 1980 letter from DOL to OCC. Also see AO 88-9 regarding self-directed IRA purchases and AO 88-28 covering self-directed IRA purchases on an initial public offering (IPO) from a mutual-to-stock thrift conversion, and AO 92-23 which permits non-discretionary purchase and retention of holding company stock.
    6. [Exclusive Purpose] The statutory phrase, "solely in the interest" is, at least in part, a codification of the most fundamental duty traditionally owed by a trustee - the duty of loyalty. Accordingly, a fiduciary bears a heavy burden in justifying his conduct in situations where his interests or the interests of others come into conflict with those of plan beneficiaries. Marshall v. Snyder, 430 F. Supp. 1224 (S.D.N.Y. 1977), aff'd in part, rev'd in part, 572 F.2d 894 (2d Cir. 1978).
    7. [Exclusive Purpose] A plan's administrator who is also an officer for the corporate employer, as a fiduciary has a duty to avoid putting himself in a position where he may be forced to compromise his duty of complete loyalty to the plan to act on the employer's behalf. Amato v. Western Union International, Inc., 773 F.2d 1402, 6 EBC 2226 (2d Cir. 1985), cert. dismissed, 474 U.S. 1113 (1986). Contra Ashenbaugh v. Crucible, Inc., 854 F.2d 1516, 9 EBC 2560 (3d Cir. 1988).
    8. [Exclusive Purpose] ERISA Section 404(a)(1) and subsection (a) require a fiduciary to act solely in the interest of the participants and beneficiaries of a plan and for the exclusive purpose of paying plan benefits at a reasonable cost. One who, in his capacity as a trustee, attempts to prevent a trust from suing him for substantial damages cannot reasonably be said to do so solely for the interest or for the exclusive purpose of benefiting others. Iron Workers Local No. 272 v. Bowen, 624 F.2d 1255 (5th Cir. 1980).
    9. [Exclusive Purpose] Preferential effect of trustees' decision alone does not constitute a violation of Section 404(a) of ERISA. Id.
    10. [Exclusive Purpose] Where trustees resolve to extend plan coverage to themselves as trustees and participants in the plan and paid themselves benefits of the plan, such self-dealing conduct was improper and a violation of fiduciary duty under ERISA Section 404(a)(1)(A) and (D). Donovan v. Daugherty, 550 F.Supp. 390, 3 EBC 2079 (S.D.Ala. 1982).
    11. [Exclusive Benefit] An employer that creates a retirement program that encourages early retirement, thereby reducing the workforce at overstaffed facilities, does not violate the exclusive purpose duty because of the consequential benefit of enhanced efficiency to the employer. Trenton v. Scott Paper Co., 832 F.2d 806, 45 Fair Empl. Prac. Case (BNA) 327, 45 Empl. Prac. Dec. (CCH) 137,744, 9 EBC 1075 (3d Cir. 1987), cert. denied, 108 S. Ct. 1576, 9 EBC 1968 (1988).
    12. [Exclusive Benefit] A fiduciary who pays himself a sales commission from plan assets in the sale of plan property despite the lack of any obligation on the part of the plan to pay the commission violates Section 404(a)(1). Marshall v. Kelly, 465 F. Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
    13. [Exclusive Benefit] Where the sale of ownership of the employer is likely to have an impact on the plan's ability to obtain payment on employer notes held by the plan, which, in turn, is likely to affect the plan's ability to pay benefits under the plan, the plan trustees' duties of loyalty and prudence require them to advise the participants of the full facts concerning the sale. Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wisc. 1979).
    14. [Exclusive Purpose - Arbitrary & Capricious] Because the potential burden of per se personal liability for any violation of ERISA might deter capable persons from serving as trustees of benefit plans, Section 404 of ERISA does not establish a per se rule of fiduciary conduct and a trustee's decision to cancel past service credits will not be overturned unless it is arbitrary and capricious. Fentron Industries, Inc v. Shopmen Pension Fund, 674 F.2d 1300, 34 Fed. R. Serv.2d 281, 94 Lab. Cas. (CCH) Para 113,559, 3 EBC 1323 (9th Cir. 1982).
    15. [Exclusive Purpose - Arbitrary & Capricious] In reviewing the propriety of trustees' action, the judicial standard is whether the trustees acted in an arbitrary and capricious manner or abused their discretion. Robinson v. Central States Pension Fund, 572 F.2d 1208 (8th Cir. 1978). To the same effect: see Robinson v. United Mine Workers, 449 F. Supp. 941 (D.D.C. 1978); Shaw v. Kruidenier, 620 F.2d 307 (8th Cir. 1980); Mosley v. The National Maritime Union Pension and Welfare Plan, 451 F. Supp. 226 (E.D.N.Y. 1978); Taylor v. Bakery and Confectionery Welfare Fund, 455 F. Supp. 816 (E.D.N.C. 1978); Peters v. Operating Engineers Pension Fund, No. CV 76-3747-FW, slip op. (D.C.Cal., April 14, 1979); Bayles v. Central States Pension Fund, 602 F.2d 97 (5th Cir. 1979); Vaughn v. Metal Lathers Local 46 Pension Fund, No. 78 Civ. 2170 (S.D.N.Y. June 14, 1979). To the contrary, see Winpisinger v. Aurora Corporation Illinois, 456 F. Supp. 559 (N.D. Ohio 1978) (standard for judicial review is whether trustees complied with their ERISA fiduciary responsibilities). See also Pierce v. NECA-IBEW Welfare Trust Fund, 488 F. Supp. 559 (E.D.Tenn. 1978), aff'd, 620 F.2d 589 (6th Cir.), cert. denied, 449 U.S. 1015 (1980).
    16. [ESOP] While an ESOP fiduciary may be released from certain per se violations on investments in employer securities under the provisions of ERISA Sections 406 and 407, the structure of ERISA itself requires that in making an investment decision of whether or not a plan's assets should be invested in employer securities, an ESOP fiduciary, just as fiduciaries of other plans, is governed by the solely-in-the-interest and prudence tests of Sections 404(a)(1)(A) and (B). Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978).
    17. [ESOP] Trustee's failure to conform stock ownership plan to Treasury requirements applicable to ESOPs in effect at the time of plaintiff's termination was not a breach of fiduciary duty under Section 404(a)(1) of ERISA for which a beneficiary may sue when defendant's stock ownership plan never functioned as an ESOP within the meaning of ERISA regulations. Allen v. The Katz Agency, Inc. Employee Stock Ownership Plan, 677 F.2d 193, 3 EBC 1352 (2d Cir. 1982).
    18. [Plan Management] Corporate shareholders and directors, who are also pension plan investment managers and custodians violated their fiduciary duties when they refused to attend meetings of the shareholders, board of directors and trustees, thereby preventing any action in favor of the plan while also opposing the sale of shares of preferred hospital stock to the plan. Schoenholtz v. Doniger, 628 F. Supp. 1420, 7 EBC 1501 (S. D. N. Y. 1986).
    19. [Plan Management] An insurance company that possesses the ultimate responsibility to grant or deny claims is a fiduciary under ERISA and must comply with the fiduciary duties enumerated in Section 404. Wickman v. Northwestern National Life Insurance, 9 EBC 1482 (D. Mass. 1987).
    20. [Plan Management] An operator of a corporation's pension plan, who is also controlling the corporation in receivership, does not violate any fiduciary duties by amending the plan, freezing the accrual of benefits, returning excess funds to the corporation, and terminating the plan in accordance with the state court's appointment order and ERISA. Chait v. Bernstein, 645 F. Supp. 1092, 8 EBC 1126 (D.N.J. 1986), aff'd, 835 F.2d 1017, 9 EBC 1257 (3d Cir. 1987).
    21. [Contributions] Corporate president violated his fiduciary duties when he failed to forward employer contributions and employee contributions, although they were deducted from employee paychecks; failed to notify employees that contributions had not been forwarded; allocated the monies to corporate expenses; and assumed conflicting roles of fiduciary and an officer of a struggling corporation. PBGC v. Solmsen, 671 F. Supp. 938, 9 EBC 1391 (E.D.N.Y 1987).
    22. [Loans] Where trustees did not hold the local's proposal for a "loan at arm's length and compare it to other available investments, but instead did their best to accommodate" the local's needs, they violated ERISA Section 404(a)(1)(A)(i). Davidson v. Cook, 567 F. Supp. 225, 4 EBC 1816 (E. D. Va. 1983).
    23. [Loans] A trustee breaches its fiduciary obligations by (1) making loans of plan assets under terms more favorable to the debtor than the plan and then not collecting the balance due; (2) allowing loans of plan assets to a debtor with an unproven business record and unstable financial condition; (3) lending an unreasonably large portion of loan assets to one entity and then concealing the existence of such loans; and (4) failing to adhere to guidelines in plan requiring that loans be at a reasonable rate of interest with adequate collateral. Brock v. Gilliken, 677 F. Supp. 398, 9 EBC 1803 (E.D.N.C. 1987).
    24. [Loans] A fiduciary who makes or renews loans of plan assets based on inadequate security and at a lower interest rate than contemporaneous loans to others, and who fails to pursue timely repayment of principal and interest and to enforce the security agreement violates Section 404(a)(1). Marshall v. Kelly, 465 F. Supp. 341, 1 EBC 1850 (W.D.Okla. 1978); Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
    25. [Loans/Leases] Pension fund trustees do not breach their fiduciary duties when they approve the construction of an office building after seeking advice from three legal firms, professional engineers, architects, appraisers, contractors and, in addition, eliminate certain aspects or demand cheaper designs when the project appears over budget. Furthermore, a lease agreement with a union that contains certain favorable terms for the union, while also benefiting the plan participants and beneficiaries, does not make the transaction imprudent when the trustees' decisions are calculated to benefit the fund members. Donovan v. Walton, 609 F.Supp. 1221, 6 EBC 1677 (S.D.Fla. 1985), aff'd, Brock v. Walton 794 F.2d 586, 7 EBC 1769, reh'g denied, 802 F.2d 1399 (11th Cir. 1986).
    26. [Mergers & Acquisitions] A corporation which, through its pension board, acts as a fiduciary for the employee pension plan, does not breach its fiduciary duties when a purchase agreement selling a division of the company provides for the transfer of all assets, properly allocable under ERISA, to the trustees of the successor corporation's pension plan, provided the sale was not to avoid any unfunded pension obligations. United Steelworkers 2116 v. Cyclops Corp., 653 F. Supp. 574, 8 EBC 1194 (S.D.Ohio 1987), aff'd in part, vacated in part, 860 F.2d 189, 10 EBC 1345 (6th Cir. 1988).
    27. [Mergers & Acquisitions] Pension plan fiduciary, who liquidated stock of one corporation to buy shares of another corporation to further his own corporate expansion goal without any effort to seek independent analysis to examine further investment opportunities, does not satisfy the prudent person test. Sandoval v. Simmons, 622 F.2d Supp. 1174, 6 EBC 2161 (C.D.Ill. 1985).
    28. [Service in Dual Capacities: Lender and Plan Trustee] Prior to naming a bank as plan trustee, an ERISA plan had invested $796,000 in unsecured notes issued by Supreme Finance (Supreme), a used car finance company. During this time, the bank had extended a $3 million secured line of credit to Supreme. After being named trustee, the bank refused to renew its line of credit because of Supreme's financial difficulties. At the same time, the bank gave notice of resignation as trustee. Supreme subsequently filed for bankruptcy and the only assets remaining were applied to the bank's loan. The federal district court found, and was upheld on appeal, that:
  1. The bank's acceptance of the trusteeship did not violate ERISA because -
  1. nowhere does ERISA explicitly prohibit a trustee from holding positions of dual loyalties, and
  2. the act did not cause the plan's losses.
  1. The bank's decision not to renew Supreme's line of credit did not violate ERISA. The court noted that a fiduciary serving in both corporate and fiduciary capacities may make decisions in its own benefit without violating its fiduciary duty to the plan.

(Friend v. Sanwa Bank California, CA 9, No. 92-55641, 9-13-94).

    1. [Summary Plan Disclosure] ERISA Section 404(a)(1) imposes a duty to provide employees with a comprehensive explanation of the plan. However, it does not impose an affirmative duty to alert an individual participant as to the vesting requirements of the plan once that individual notifies fiduciaries that he was "thinking of retirement." Schlomchik v. Retirement Plan of Amalgamated Insurance Fund, 502 F. Supp. 240 (E.D.Pa. 1980), aff'd, 671 F.2d 496 (3d Cir. 1981).

Section 404(a)(1)(A)

Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and
(A) For the exclusive purpose of-
  (i) Providing benefits to participants and their beneficiaries; and
  (ii) Defraying reasonable expenses of administering the plan.
  1. Interpretive Bulletins
    1. A vacation plan may pay all or any portion of the benefits to which a plan participant or beneficiary is entitled to a third party without violating Section 404(a)(1)(A) if (a) the plan documents expressly provide for such payments to third parties at the direction of a participant or beneficiary, (b) the participant or beneficiary directs in writing that the plan trustees pay a named third party all or a specified portion of the sum of money that would otherwise be paid to the participant or beneficiary, and (c) payment is made to the third party only when or after the money would otherwise be payable to the participant or beneficiary. IB 78-1.
    2. Social Investments ("Economically Targeted Investments") (ETIs) Establishes DOL position on permissibility of making investments which achieve a social goal in addition to a financial return. Indicates that ETIs are not prohibited by ERISA, and that their choice as an investment must follow DOL ERISA regulation 2550.404a-1 regarding Investment Duties, be prudent, not be a prohibited transaction, and not provide less return to a plan than a normal investment. IB 94-1.
    3. Proxy Voting. Among the fiduciary responsibilities of an investment manager are those to vote proxies for stock owned by ERISA plans. IB 94-2.
    4. Investment Policies. An investment policy designed to further the purposes of a plan and its funding policy is consistent with, but not required by, ERISA 404(a)(1)(A) and (B). IB 94-2.
  1. Advisory Opinions
    1. Payments by a plan for services rendered by a person prohibited from being employed in any capacity by the plan may violate Section 404(a)(1)(A). AO 75-90.
    2. If a participant or beneficiary in Plan A refuses to repay an erroneous overpayment of benefits to Plan A, the fiduciaries of Plan B, a related plan, would fail to be acting solely in the interests of the plan's participants and beneficiaries if they attempted to penalize the participant or beneficiary by delaying or reducing benefits under Plan B. AO 77-07.
    3. A plan provision authorizing reimbursement of legal fees in the event of any legal action that may arise from the performance of a trustee's fiduciary duties is too broad and would be prohibited under Section 404(a)(1)(A). Where a fiduciary is found in a legal proceeding to have violated his fiduciary duties, reimbursement of legal fees by the plan would not be permitted. AO 78-29.
  1. Court Decisions
    1. [Provide Benefits] Dividing pension benefits, once they are being paid out, between a participant and his divorced spouse does not violate Section 404(a)(1)(A). Campa v. Campa, 89 Cal. App.3d 113C (1st Dist. 1979), appeal dismissed, Carpenters Pension Trust Fund for Northern California v. Campa, 444 U. S. 1028 (1980).
    2. [Provide Benefits] The payment of rent on behalf of the widow of a former plan trustee constitutes a violation of Section 404(a)(1)(A) even though the payment was morally commendable and not made for the personal gain of plan fiduciaries. Marshall v. Cuevas, I EBC 1580 (D.P.R. 1979).
    3. [Provide Benefits] Where a plan participant has nonforfeitable vested pension rights under the plan, the plan administrative committee's denial of those rights; based on a retroactive plan amendment adopted by the plan sponsor violated the administrative committee's fiduciary duty to pay benefits when due. Fox v. Abrams, No. CV 77-881-ALS, slip op. (C.D.Cal. 1978).
    4. [Exclusive Purpose] Plan monies, even if they constitute surplus assets, must be applied for the exclusive purpose of plan participants and beneficiaries. Marshall v. Snyder, 430 IF. Supp. 1224 (S.D.N.Y. 1977), aff'd in part, rev'd in part, 572 F.2d 894 (2d Cir. 1978).
    5. [Exclusive Purpose] Where a plan trustee fails to keep adequate records of the plan's financial obligations, questions of whether the plan owes money to the trustee should be resolved in favor of the plan. Marshall v. Kelly, 465 F. Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
    6. [Exclusive Purpose] Lease by a plan of an aircraft unnecessary for plan operation violates Section 404(a)(1). Usery v. Wilson, 3-76-373 (E.D.Tenn. 1977) (consent order).
    7. [Exclusive Purpose] Purchase by a multiemployer plan of individual automobile insurance policies for plan trustees and employees violates Section 404(a)(1)(A). Usery v. Wilson, 3-76-373 (E.D.Tenn. 1977) (consent order).
    8. [Reasonable Expenses] Payments of in excess of $1 million over a two and one-half year period by a multiemployer plan to an individual for administrative services constitutes excessive compensation in violation of Section 404(a)(1)(A). Marshall v. Snyder, 430 F. Supp. 1224 (S.D.N.Y. 1977), aff'd in part, 572 F.2d 894 (2d Cir. 1978). To the same effect, see Marshall v. Knee, No. C-3-7793 (S.D.Ohio 1977) (complaint).
    9. [Reasonable Expenses] A fiduciary who causes a plan to pay excessive amounts for the construction of a building on plan property violates Section 404(a)(1)(A). Marshall v. Kelly, 465 F. Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).

Section 404(a)(1)(B)

"Prudent Man Rule"

Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims.
  1. Statute
  2. Investments in collectibles are generally prohibited by Section 408(m) of the Internal Revenue Code and PTE 91-55.

  3. Regulations
    1. Refer to DOL ERISA Regulation 2550.404a-1.
  1. The regulation sets forth guidelines for plan fiduciaries for compliance with the prudence requirement in connection with their investment duties.
  2. As a general rule, a fiduciary, in connection with his or her investment duties, is required to give appropriate consideration to those facts and circumstances that, given the scope of such fiduciary's investment duties, the fiduciary knows or should know are relevant to the particular investment or investment course of action involved. This includes consideration of the role an investment is intended to play in the plan's investment portfolio for which the fiduciary has investment duties.
  3. The regulations also set forth a safe harbor rule. If a fiduciary complies with the safe harbor rule, the Labor Department will presume that the fiduciary has complied with the prudence requirement.

The safe harbor rule requires a fiduciary in connection with any particular investment or investment course of action -

  1. To determine that the investment is reasonably designed as part of the portfolio (or the portion of the plan's portfolio) for which the fiduciary has investment duties) to further the purposes of the plan, taking into account the investment's risk of loss and opportunity for gain; and
  2. To consider the portfolio's (or portion of the portfolio's) -
  1. Diversification,
  2. Liquidity and current return relative to plan cash flow, needs, and
  3. Projected return relative to plan funding requirements.
    1. For a definition of plan assets, see DOL ERISA Regulation 2510.3-101.
    2. See DOL ERISA Regulation 404c-1, which exempts fiduciaries from certain ERISA liability, including the duty to monitor for prudence, if plans meet certain conditions and participants direct their own investments.
  1. Interpretive Bulletins
    1. A plan fiduciary responsible for appointing trustees or other plan fiduciaries should periodically review the performance of such trustees or other fiduciaries. The procedure for review may vary according to the circumstances. IB 75-8, Question FR-17.
    2. Plan fiduciaries may rely on information and data supplied by non-fiduciaries in discharging their fiduciary duties. IB 75-8, Question FR-11.
    3. Social Investments ("Economically Targeted Investments") (ETIs) Establishes DOL position on permissibility of making investments which achieve a social goal in addition to a financial return. Indicates that ETIs are not prohibited by ERISA, and that their choice as an investment must follow DOL ERISA regulation 2550.404a-1 regarding Investment Duties, be prudent, not be a prohibited transaction, and not provide less return to a plan than a normal investment. IB 94-1.
    4. Proxy Voting. Among the fiduciary responsibilities of an investment manager are those to vote proxies for stock owned by ERISA plans. IB 94-2.
    5. Investment Policies. An investment policy designed to further the purposes of a plan and its funding policy is consistent with, but not required by, ERISA 404(a)(1)(A) and (B). IB 94-2.
  1. Advisory Opinions
    1. [General] Section 404(a)(1)(B) does not absolutely prohibit any general type of investment. Whether an investment is prudent depends on the nature of the investment and the character and aims of the plan. AO 75-83.
    2. [Bank Stock - Purchase/Retention/Sale of Fiduciary Bank/BHC Stock]: The discretionary purchase, retention, or sale of the stock of the fiduciary bank is imprudent. DOL indicates that "it burdens our imagination to envision a situation in which a trustee with investment discretion could make an objective decision, solely on the basis of the prudence standard, regarding the purchase or sale of its own stock." [emphasis added] See 1980 letter from DOL to OCC. Also see AO 88-9 regarding self-directed IRA purchases and AO 88-28 covering self-directed IRA purchases on an initial public offering (IPO) from a mutual-to-stock thrift conversion, and AO 92-23 which permits non-discretionary purchase and retention of holding company stock.
    3. [Mortgage Valuations] Plan fiduciaries will be acting prudently under Section 404(a)(1)(B) if they value plan assets consisting of real estate mortgage loans that the plan has no current intention of selling and that are not financially troubled at the remaining principal balance of the loan. Financially troubled loans should be valued on the basis of any guarantees, security or other factors that a prudent person would deem relevant. AO 77-78; AO 77-81.
    4. [DOL Investigations] Where the Labor Department is already conducting an investigation of plan investments, the new investment managers for the plan will be acting prudently under Section 404(a)(1)(B) if they report any breaches of fiduciary duties by others of which they become aware to the plan trustees and to the Labor Department and make available to the Labor Department all information requested about past transactions. AO 77-60/61; AO 77-79/80.
  1. Court Decisions
    1. [General] ERISA's prudence test is not that of a prudent lay person but, rather, that of a prudent fiduciary with experience dealing with a similar enterprise. Marshall v. Snyder 430 F. Supp. 1224 (S.D.N.Y. 1977), aff'd in part, rev'd in part, 572 F.2d 894 (2d Cir. 1978).
    2. [General] Plan trustees violate their fiduciary obligations if they act arbitrarily or capriciously in light of all of the surrounding circumstances. Reviewing courts are hesitant to second guess the trustees' decisions and will do so only if there is no reasonable justification for the decision. Stewart v. National Shopmen Pension Fund, 795 F.2d 1079, 7 EBC 1917 (D.C.Cir. 1986).
    3. [General] Fiduciaries are not relieved of their fiduciary responsibilities by their lack of involvement in a particular transaction. By failing to monitor the conduct of other trustees, a trustee may violate Section 404(a)(1)(B) and be held liable under Section 405(a)(2). Marshall v. Dekeyser 485 F, Supp. 629, 1 EBC 1898 (W.D.Wisc. 1979).
    4. [General] The prudent person standard found in Section 404 is violated if a trustee who lacks the requisite education, experience and skill to make investment decisions fails to consult independent counsel prior to the making of such decisions. Donovan v. Walton, 609 F. Supp. EM, 6 EBC 1677 (S.D.Fla. 1985), aff'd, Brock c Walton 794 F.2d 586, 7 EBC 1769, reh'g denied, 802 F.2d 1399 (11th Cir. 1986).
    5. [Plan Management] Failure by trustees of a multiemployer plan to maintain full and complete minutes of trustees meetings constitutes a violation of Section 404(a)(1)(B). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
    6. [Plan Management] Implicit in ERISA's standard for fiduciary responsibility set forth under Section 404 is fiduciaries' duty to take an initiative to cause reasonably available evidence to be developed and considered in the decision making process. An employer and underwriter breached the duly to develop such evidence by relying upon erroneous, incomplete and sometimes irrelevant information in denying claims and thereby rendered their decisions in an arbitrary and capricious manner. Rosen v. Hotel and Restaurant Employees Union, 637 F.2d 592, 106 L.R.R.M. (BNA) 2745, 90 Lab. Cas. (CCH) Para 912,612, 2 EBC 1054 (3d Cir.), cert. denied, 454 U.S. 898 (1981).
    7. [Arbitrary/Capricious Actions] Pension fiduciaries breach fiduciary duty when they act arbitrarily and capriciously or act with improper discriminatory or bad faith motives. Chambless v. Masters, Mates and Pilots Pension Plan, 571 F. Supp. 1430 (S.D.N.Y. 1983).
    8. [Arbitrary/Capricious Actions] Trustees violated the prudent man standard when they failed to adequately investigate the basis and justification for the payment of over $10 million to a claims processing company as fees for services over a two year period, notwithstanding the court's subsequent finding that the fees were reasonable. Brock v. Robbins 830 F.2d 640, 8 EBC 2489 (7th Cir. 1987).
    9. [ESOP] While an ESOP fiduciary may be released from certain per se violations on investments in employer securities under the provisions of Sections 406 and 407 of ERISA, the structure of ERISA itself requires that in making an investment decision of whether or not a plan's assets should be invested in employer securities, an ESOP fiduciary, just as fiduciaries of other plans, is governed by the solely-in-the-interest and prudence tests of Sections 404(a)(1)(A) and (B). Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978).
    10. [ESOP] United Missouri Bank won a case where it continued to purchase a distressed company's stock for an ESOP, relying on an independent appraiser's valuation. The 10th Circuit Court of Appeals ruled that the bank (1) followed "proper" directions from the ESOP administrator, (2) paid no more than "appropriate consideration" by relying on the appraisals, (3) retained the stock appropriately because it was restricted by the ESOP agreement and to do so "would have run counter to the intended purpose of [the] ESOP," and (4) maintained an effective Chinese Wall within the bank to prevent transmittal of material inside information from the commercial lending to the trust investment areas. Ershick v. United Missouri Bank of Kansas City, N.A., 948 F.2d 660 (10th Cir. 1991).
    11. [ESOP] A Washington bank was found liable for following a similar procedure in Fink v. National Savings & Trust Co., 772 F.2d 951 (D.C. Cir. 1985). The court found the ERISA fiduciary duty of prudence overrides the provisions of plan, such as in ESOPs, which are designed to invest in employer stock.
    12. [ESOP] Banc One Arizona settled for $19 million (plus a $1.15 million DOL penalty) involving the Kroy, Inc., ESOP covering 400 employees. Kroy eventually declared bankruptcy. Banc One continued purchasing stock until Kroy declared bankruptcy. Banc One was criticized for apparently paying too much for the stock. The primary issue of the case dealt with ERISA Section 3(18)(B) regarding "adequate consideration."
    13. [ESOP] The Statewide Bancorp ESOP directed the Plan Committee (who were also directors) to invest "primarily" in Statewide stock. The Committee continued to purchase Statewide stock even as its stock price fell to less than 25 cents a share. Eventually, all remaining assets were placed in money market accounts. Statewide declared bankruptcy. The 3rd Circuit Court of Appeals found that the purchase of Statewide stock was permissive, not mandatory. The court held that two standards apply:
  • If the plan requires investment in employer securities, the trustee must comply unless "compliance would be impossible or illegal" or a court approves a deviation.
  • If investment language is permissive, "the fiduciary must still exercise care, skill, and caution in making decisions to acquire or retain the investment." In such permissive situations, the fiduciary is presumed to have complied with ERISA in purchasing employer securities unless the facts and circumstances would defeat or substantially impair the purposes of the trust. If trustees are also directors or officers of the employer, they must show that they acted impartially in investigating available investment alternatives - particularly if the employer is experiencing financial difficulty.

The court evaluated the reasonableness of the trustees' actions under the standard set by the U.S. Supreme Court, in the Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101 (1989) case. Reasonableness is judged by whether:

  • the interpretation is consistent with the goals of the plan;
  • it renders any plan language meaningless or internally inconsistent;
  • it conflicts with the substantive or procedural requirements of ERISA law;
  • the provision has been interpreted consistently; and
  • the interpretation is contrary to the clear language of the plan.

Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995).

    1. [Investments] Purchase of stock in a financially unstable corporation constitutes a violation of Section 404(a)(1)(B). Usery v. Wilson, et al, No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
    2. [Loans] Evidence that mortgage loans were made at interest rates below the prevailing market rate is insufficient to establish a violation of the prudent investor rule established in ERISA Section 404(a)(1)(A) and (B) where pension fund trustees, in developing a plan participant mortgage loan program, consulted with experts, including accountants and mortgage brokers; examined and considered rates charged on traditional and nontraditional mortgage loans; examined the prospective borrower's employment background; required that the loan be adequately secured; and thereafter set highest rates that not only generated a higher rate of return than any other portfolio asset but exceeded the fund's actuarial and funding requirements. Brock v. Walton, 794 F.2d 586, 7 EBC 1769 (11th Cir.), reh'g denied, 802 F.2d 1399 (11th Cir. 1986) (en banc).
    3. [Loans] Trustees making loans violated the prudence test under ERISA Section 404(a)(1)(B) by failing to properly appraise the proposed building, investigate the borrower's financial resources, evaluate the likely rental income to be derived from the building, take an assignment of rents, require sureties on the loan and require a principal repayment schedule. Davidson v. Cook, 567 F. Supp. 225, 4 EBC 1816 (E.D.Va. 1983), aff'd, 734 F.2d 10 (4th Cir.), cert. denied, 469 U.S. 899 (1984).
    4. [Loans] Where independent investigation based on financial statements would have disclosed imprudence of making loans and where trustees failed to seek outside counsel when "under the circumstances then prevailing ... a prudent man acting in a like capacity and familiar with such matters" would have sought outside counsel, ERISA, Section 404(a)(1)(B) is violated. A trustee's duty to make an independent investigation includes the obligation of not relying on representations, predictions, and hopes of a borrower. Katsaros v. Cody, 503 F. Supp. 360, 4 EBC 1910 (E.D.N.Y 1983).
    5. [Loans] Even assuming the real estate attorney for the pension fund was a fiduciary, the opening bid of $5 million where the property was allegedly worth less, was not a breach of fiduciary duty of care under Section 404 of ERISA when the bid was made in the context of a foreclosure sale, the final judgment against the debtor was $9,615,422.26, and an unrealistically low bid might have precluded a deficiency judgment. Furthermore, although attorney was not instructed to establish $100,000 bid increments, such action was not imprudent where he was instructed to continue bidding the price upwards to $7 million. Donovan v. Nellis, 528 F. Supp. 538, 33 Fed. Rul. Serv. 2d (Cahaghan) 1742, 2 EBC 2209 (N.D.Fla. 1980.
    6. [Loans - Employer] Where plan trustees make loans to employers that lack any security and are at interest rates below those that an arm's length lender would accept under the circumstances the trustees have violated Section 404(a)(1)(B). Marshall v. Dekeyser; 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
    7. [Mergers & Acquisitions] In a contest for corporate control where potential conflicts of interest between plan administrators and beneficiaries existed, administrators who did not conduct independent, "intensive and scrupulous" investigation of plan's investment options violated ERISA Section 404. Leigh v. Engle, 727 F.2d 113, 4 EBC 2702 (7th Cir. 1984).
    8. [Mergers & Acquisitions] Trustees breached ERISA's exclusive purpose and prudent man rules Section 404(a)(1)(A) and (B), by agreeing to the sale of employer securities to the employer's pension plan as part of alleged attempt to maintain corporate control without conducting any investigation as to the proposed transaction. Dimond v. Retirement Plan, 582 F. Supp. 892, 4 EBC 1457 (W.D.Pa. 1983).
    9. [Mergers & Acquisitions] Where sale of ownership of the employer is likely to have an impact on the plan's ability to obtain payment on employer notes held by the plan, which, in turn, is likely to affect the plan's ability to pay benefits under the plan, the plan trustees' duties of loyalty and prudence require them to advise the participants of the full facts concerning the sale. Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
    10. [Payments, Excessive] Payment of an excessive amount of rent by a plan for the lease of an aircraft violates Section 404(a)(1)(B). Usery v. Wilson, et al., No. 3-76-373 (E. D.Tenn., June 6, 1977) (consent order).
    11. [Payments, Excessive] Trustees of an employee welfare plan breached fiduciary duties when they improperly overpaid a law firm $292,800 for legal services rendered to members of the plan. Law firm that knowingly receives excessive payments from trustees of a plan is held accountable for the breaches committed by the trustees and jointly liable for be overpayment. Benvenuto v. Schneider, 678 F. Supp. 51, 9 EBC 1528 (E.D.N.Y. 1988).
    12. [Recordkeeping] A company was delegated by a bank trustee or custodian for self-directed IRA accounts the function of maintaining records and preparing appropriate reports required by Section 103 of ERISA. A company maintaining records necessary for the preparation of such reports is a plan fiduciary and must perform these functions with the degree of care set forth in Section 404(a)(1)(B). Redwood Bank v. QTA, Inc., No. C-79-1586, slip op. (N.D.Cal., Oct. 23, 1979).
    13. [Self-Dealing] Purchase of automobile insurance covering plan trustees and employees, but which does not protect the plan, constitutes a violation of Section 404(a)(1)(B). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).

Section 404(a)(1)(C)

Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.
  1. Advisory Opinions
    1. [Deposits - Insured/Uninsured] The diversification requirement of Section 404(a)(1)(C) generally will not be violated if all plan assets in an individual account plan are invested in a federally insured savings account, so long as the account is fully insured. Where the account balance exceeds the amount covered by federal insurance, compliance with Section 404(a)(1)(C) is determined by whether the bank invests its assets in a diversified manner. AO 77-46.
    2. [Collective Investment Funds] An investment by an ERISA plan in a single collective investment pool may be deemed to be a properly diversified investment if the pool is itself diversified. In this case, each of the investments of the collective trust is deemed to be an investment of the plan. AO 80-13A.
    3. [Mutual funds/Annuities] A plan may invest all of its assets in insurance or annuity contracts (AO 75-79) or a mutual fund (AO 75-93) without violating Section 404(a)(1)(C) dealing with diversification.
    4. [Real Estate] Where the assets of a plan consist largely of real estate mortgage loans, the new investment managers of the plan will not violate the diversification requirements of Section 404(a)(1)(C) if they follow a policy whereby decisions to retain or dispose of individual loans and properties will be made on the basis of economic and prudent management generally and not on a basis that requires diversification of plan assets in situations in which the principles of economic and prudent management would indicate that such loans and properties should be retained. AO 77-62/63.
    5. [REIT] Proper diversification for plan assets invested in a real estate investment trust (REIT) is determined by considering the assets held by the REIT. AO 78-30.
  1. Court Decisions
    1. [General] Section 404 of ERISA requires that fiduciaries conduct their activities as would a prudent man under similar circumstances. While there is flexibility in the prudence standard, it is not a refuge for fiduciaries who are not equipped to evaluate a complex investment. Glass/Metal Association and Glaziers and Glass Workers Pension Plan, 507 F. Supp. 378, 2 EBC 1006 (D.Hawaii 1980).
    2. [General] Where plan trustees, lacking prior lending experience, fail to follow the procedure that a prudent lender would utilize by failing to consider other real estate investment vehicles that offered greater opportunity for diversification, and by committing plan assets without adequate procedures for evaluation of a risk, the plan trustees violated their duty to act with care, skill, prudence and diligence as required under Section 404(a)(1)(B) of ERISA. Glass/Metal Association and Glaziers and Glass Workers Pension Plan, 507 F. Supp. 378, 2 EBC 1006 (D.Hawaii 1980).
    3. [General] In contrast to traditional trust law, both Congress and the courts have recognized that the diversification requirement of ERISA Section 404(a)(1)(C) imposes a separate duty on plan fiduciaries to spread the risk of loss of the plan. Therefore, if consummated, a commitment of 23% of the pension plan's total assets to a single loan would subject a disproportionate amount of the pension trust's assets to the risk of a large loss and violate the diversification requirement. Glass/Metal Association and Glaziers and Glass Workers Pension Plan, 507 F. Supp. 378, 2 EBC 1006 (D.Hawaii 1980).
    4. [Loans] A loan of 36% of plan assets to finance the expansion of a hotel and gambling casino violates Section 404(a)(1)(C). Marshall v. Teamsters Local 282 Pension Trust Fund, 458 F. Supp. 986 (E.D.N.Y. 1978).
    5. [Loans - Employers] The investment of virtually all of a plan's assets in loans to employers, on its face, represents a complete failure to diversify the investments of the plan so as to minimize the risk of large losses required by Section 404(a)(1)(C). Once a plaintiff proves failure to diversify, the burden shifts to the defendant to demonstrate that nondiversification was prudent under the circumstances. Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
    6. [Loans] Where trustees failed to collect what defendants owed the pension trust, renewed unfavorable loans and failed to diversity holdings, they violated Section 404(a)(1)(B) and (C). Donovan v. Schmoutey, 592 F. Supp. 1361 (D.Nev. 1984).
    7. [Market Valuation] Pension plan service company that fails to revalue the market value of properties to determine a fair rental value to the lessee, the plan's sponsor, and also fails to advise trustees that the plan assets should be diversified and not concentrated in the buildings leased to the plan's sponsor, breaches its fiduciary duties under ERISA. Brock v. Self, 632 F. Supp. 1509, 7 EBC 1512 (W. D. La. 1986).
 

Section 404(a)(1)(D)

Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and In accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter or subchapter III of this chapter.
  1. Interpretive Bulletins
    1. A vacation plan may pay all or any portion of the benefits to which a plan participant or beneficiary is entitled to a different party without violating Section 404(a)(1)(D) if (a) the plan documents expressly provide for such payments to third parties at the direction of a participant or beneficiary, (b) the participant or beneficiary directs in writing that the plan trustees pay a named third party all or a specified portion of the sum of money that would otherwise be paid to the participant or beneficiary and (c) payment is made to the third party only when or after the money would otherwise be payable to the participant or beneficiary. IB 78-1.
    2. Investment Policies. An investment policy designed to further the purposes of a plan and its funding policy is consistent with, but not required by, ERISA 404(a)(1)(A) and (B). If one exists, it is considered one of the "documents and instruments governing the plan", and must be followed. IB 94-2.
  1. Advisory Opinions
    1. Within the mandate of Section 404(a)(1)(D) is the rule that plan trustees and fiduciaries must administer the plan in accordance with clear and unambiguous provisions of the plan document and the law. The fact that policy reasons mandate a change in the plan provisions is relevant to a judicial review of the validity of the plan change, but such conditions are not relevant in the interpretation and implementation of such rule. Where, in this case, the plan's rules were clear and unambiguous and were upheld by the courts as valid, the trustees must enforce them as so written. AO 82-IA.
    2. Whether the trustees can accept contributions from employers for certain specific individuals or classes thereof and/or make benefit payments to such individuals is a matter to be determined by the plan document. Section 404(a)(1)(D) requires that the plan be administered in accordance with the plan document to the extent that the plan document is in accordance with the law. AO 81-30A.
  1. Court Decisions
    1. A limitation in the plan instruments on the authority of the trustees to invest plan assets, which is not inconsistent with any provisions of ERISA, is binding on the trustees under Section 404(a)(1)(D). Marshall v. Teamsters Local 282 Pension Trust Fund, 458 F. Supp. 986 (E.D.N.Y. 1978).
    2. Where plan document provided that administrative committee member having interest in transaction shall not participate in transaction and fiduciary acted contrary to plan terms, there was a violation of ERISA Section 404(a)(1)(D). Donovan v. Cunningham, 716 F.2d 1455, 4 EBC 2329 (5th Cir. 1983), cert. denied, 467 U.S. 1251 (1984).
    3. Payment of compensation to plan trustees without express authorization in plan instruments violates Section 404(a)(1)(D). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
    4. Payment of benefits to ineligible persons violates Section 404(a)(1)(D). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
    5. A trustee's failure to declare his own forfeiture of benefits under a plan by reason of his violation of a 'bad boy' clause does not constitute a breach of fiduciary duty. Fremont v. McGraw-Edison Company, 460 F. Supp. 599 (N.D.Ill. 1978), aff'd in part, rev'd in part, 606 F.2d 752 (7th Cir. 1979), cert. denied, 445 U.S. 951 (1980).
    6. Dividing pension benefits, once they are being paid out, between a participant and his divorced spouse does not violate Section 404(a)(1)(D). Campa v. Campa, 89 Cal. App.3d 113C (1st Dist. 1979), appeal dismissed, Carpenters Pension Trust Fund for Northern California v. Campa, 444 U. S. 1028 (1980).
 

Section 404(a)(2)

In the case of an eligible individual account plan (as defined in Section 407(d)(3)), the diversification requirement of paragraph (1)(C) and the prudence requirement (only to the extent that it requires diversification) of paragraph (1)(B) is not violated by acquisition or holding of qualifying employer real property or qualifying employer securities (as defined in Section 407(d)(4) and (5)).
  1. Conference Report
  2. This provision is discussed on page 317 of the Congressional Conference Report.

  3. Advisory Opinions
    1. The purchase of employer securities by a profit-sharing plan is covered by Section 404(a)(2). AO 75-89; WSB 79-86 (thrift plan).

Section 404(b)

Except as authorized by the Secretary by regulation, no fiduciary may maintain the indicia of ownership of any assets of a plan outside the jurisdiction of the district courts of the United States.

  1. Conference Report
  2. Page 306 of the Congressional Conference Report explains this provision.

  3. Regulations

        Refer to DOL ERISA Regulation 2550.404b-1.

    1. Plan assets may be held by persons located outside the United States if the assets are foreign securities and (a) the plan fiduciary, empowered to authorize such holding is a United States regulated bank, insurance company or investment adviser, has its principal place of business in the United States and meets certain minimum financial conditions; or (b) the securities are in the possession of a United States bank, a registered broker or dealer; or an SEC-designated "satisfactory control location" and certain other conditions are met. DOL ERISA Regulation 2550.404b-1.
    2. An ADR (American depository receipt) that enables a person to demand delivery of a foreign security constitutes the "indicia of ownership" of the foreign security for purposes of Section 404(b). Preamble to DOL ERISA Regulation 2550.404b-1.
    3. The indicia of ownership of any plan assets (e.g., foreign securities, United States securities, etc.) attributable to contributions made on behalf of plan participants who are Canadian citizens or residents may be maintained in Canada if required by Canadian tax or other laws. DOL ERISA Regulation 2550.404b-1.
  1. Advisory Opinions
    1. Section 404(b) does not prohibit the investment of plan assets in enterprises located outside the United States provided that the indicia of ownership (e.g., stock certificates) of such assets is maintained in the U.S. (or in accordance with DOL ERISA Regulation 2550.404b-1). AO 75-80.

Section 404(c)

In the case of a pension plan which provides for individual accounts and permits a participant or beneficiary to exercise control over assets in his account, if a participant or beneficiary exercises control over the assets in the account (as determined under regulations of the Secretary) -
(1) Such participant or beneficiary shall not be deemed to be a fiduciary by reasons of such exercise, and
(2) No person who is otherwise a fiduciary shall be liable under this part for any loss, or by reason of any breach, which results from such participant's, or beneficiary's exercise of control.
  1. Conference Report
  2. This provision is explained on pages 305-306 of the Congressional Conference Report.

  3. Regulations
  4. See DOL ERISA Regulation 404c-1, which exempts fiduciaries from certain ERISA liability if plans meet certain conditions and participants direct their own investments.

  5. Advisory Opinions
    1. Section 404(c) does not exempt transactions covered by Section 404(c) from all provisions of ERISA; it only exempts fiduciaries from liability regarding such transactions and the participant or beneficiary from being a fiduciary by reason of exercising control under Section 404(c). AO 75-81.
    2. The fact that transactions might be exempted from the provisions of Section 406 by reason of Section 404(c) does not affect the application of Section 4975 of the Code. PLR 7821122.
    3. [Individual Account] A person who is a plan fiduciary and who also exercises control over assets in his or her own individual account will not be treated as a fiduciary with respect to such exercise of control. AO 75-24.
  1. Court Decisions
    1. [Fiduciary Liability for Self-Directed Plan Investments] A 401(k) plan offered GICs as one of several investment vehicles for plan participants, who directed their own investments. GICs were issued, in part, by Executive Life Insurance. The trustees relied on ratings of rating services. When Executive Life encountered financial difficulties and was eventually downgraded by the rating services, the plan notified participants that GIC investments were not guaranteed from loss. Unisys negotiated more liberal waiting periods for transfers from the GIC fund to other investment vehicles, but was restricted on what it could tell participants. As a result, it did not tell participants of Executive Life's problems. Unisys did; however, pay for the replacement of an annuity issued to its Chairman by Executive Life with an annuity from another insurer. Executive Life was declared insolvent by state insurance regulators in 1991. Plan participants sued the fiduciaries for breach of fiduciary responsibilities under ERISA Section 404(a). The Unisys trustees' defense was that they were protected from fiduciary responsibility by ERISA Section 404(c).

The courts ruled that (1) the duty of prudent inquiry may have been breached by total reliance on insurance rating services, (2) plan fiduciaries did not release material information to plan participants, (3) the participants' control over their investments may release the fiduciaries from investment liability, and (4) the case was remanded back to the District Court so plan participants may pursue their claims [3rd Circuit Court of Appeals, In Re Unisys Savings Plan Litigation (Meinhardt v. Unisys Corp.), 74 F.3d 420 (3d. Cir. 1996)].

 

Co-Fiduciary Liability

ERISA Section 405

Section 405(a)

In addition to any liability which he may have under any other provision of this part, a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan in the following circumstances:
(1) If he 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 failure to comply with section 404(a)(1) in the administration of his specific responsibilities which give rise to his status as a fiduciary, he has enabled such other fiduciary to commit a breach; or
(3) If he had knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.
  1. Conference Report
  2. Pages 299-300 of the Congressional Conference Report discuss co-fiduciary liability provisions.

  3. Interpretive Bulletins
    1. A plan fiduciary who knows of a breach committed by another fiduciary must take steps to remedy the breach, such as instituting a lawsuit, notifying the Department of Labor or publicizing the breach. Mere resignation by the fiduciary as a protest against the breach is not sufficient. IB 75-5, Question FR-10.
    2. Even though a fiduciary has only limited functions to perform (e.g., because the fiduciaries have properly allocated functions among themselves or delegated them to others), the fiduciary can become liable for breaches in other areas by other plan fiduciaries under Section 405(a). IB 75-8, Questions FR-13, FR-14 and FR-16.
    3. Where the Labor Department is already conducting an investigation of plan investments, the new investment managers for the plan will not be acting in violation of Section 405(a) if they report any breaches of fiduciary duties by others of which they become aware to the plan trustees and to the Labor Department and make available to the Labor Department all information requested about past transactions. AO 77-60/61; AO 77-79/80.
  1. Court Decisions
    1. [General] A fiduciary is liable under ERISA Section 405(a)(1) if he participates knowingly in, or knowingly undertakes to conceal, a co-fiduciary's breach of duty. Davidson v. Cook, 567 F. Supp. 225, 4 EBC 1816 (E.D.Va. 1983), aff'd, 734 F.2d 10 (4th Cir.), cert. denied, 469 U.S. 899 (1984).
    2. [General] ERISA Section 405 does not impose vicarious liability; actual knowledge is required. The fiduciary must know the other person is a fiduciary to the plan, must know that he participated in the act that constituted a breach, and must know that it was a breach. Donovan v. Cunningham, 716 F.2d 1455, 4 EBC 2329 (5th Cir. 1983), cert. denied, 467 U.S. 1251 (1984).
    3. [General] Under Section 405 of ERISA a fiduciary is liable for a co-fiduciary's breach of fiduciary duties if he knowingly participates and/or conceals such breach; furthermore, a fiduciary is required to make reasonable efforts to remedy a known breach by another fiduciary. Davidson v. Cook, 567 F. Supp. 225, 4 EBC 1816 (E.D. Va. 1983), aff'd, 734 F.2d 10 (4th Cir.), cert. denied, 469 U.S. 899 (1984).
    4. [General] Co-fiduciaries each have responsibility for the actions of the others and will be found liable for the others' breach of fiduciary duty if such co-fiduciary participates knowingly in a breach or if, by his failure to comply with Section 404 of ERISA, he enables another fiduciary to commit a breach. LeFebre v. Westinghouse Electrical Corp., 549 F. Supp. 1021, 3 EBC 2353, as amended by 3 EBC 2359 (D.Md. 1982), rev'd, 747 F.2d 197 (4th Cir. 1984).
    5. [General] Relying on the advice or information of a co-trustee alone may subject a trustee to liability. Katsaros v. Cody, 568 F. Supp. 360, 4 EBC 1910 (E.D.N.Y. 1983).
    6. [Omission vs. Commission] Fiduciaries are not relieved of their fiduciary responsibilities by their lack of involvement in a particular transaction. By failing to monitor the conduct of other trustees, a trustee may violate Section 404(a)(1)(B) and be held liable under Section 405(a)(2). Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
    7. [Successor Trustees] New trustees of a plan are not required to investigate how prudently prior trustees had negotiated a contract. If the contract terms are found reasonable and no other facts indicate the contrary, new trustees are not liable if prior trustees committed a breach of their fiduciary duties by acting imprudently. Brock v. Robbins, 830 F.2d 640, 8 EBC 2489 (7th Cir. 1987).
    8. [Successor Trustees] A successor trustee has a duty to liquidate prior improper investment upon assuming his responsibilities. Marshall v. Craft 463 F. Supp. 493 (N.D.Ga. 1978). See also Morrissey v. Curran, 567 F.2d 546 (2d Cir. 1977).
    9. [Resignation Not a Cure] Resignation by a fiduciary is not sufficient to discharge the fiduciary's duty under Section 405(a)(3) to make reasonable efforts to remedy the breach of another fiduciary. Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
 

Section 405(b)

(1) Except as otherwise provided in subsection (d) and in section 403(a)(1) and (2), if the assets of a plan are held by two or more trustees -
  (A) Each shall use reasonable care to prevent a co-trustee from committing a breach; and
  (B) They shall jointly manage and control the assets of the plan, except that nothing in this subparagraph (B) shall preclude any agreement authorized by the trust instrument, allocating specific responsibilities, obligations, or duties among trustees, in which event a trustee to whom certain responsibilities, obligations, or duties have not been allocated shall not be liable by reason of this subparagraph (B) either individually or as a trustee for any loss resulting to the plan arising from the acts or omissions on the part of another trustee to whom such responsibilities, obligations, or duties have been allocated.
(2) Nothing in this subsection shall limit any liability that a fiduciary may have under subsection (a) or any other provision of this part.
(3) (A) In the case of a plan the assets of which are held in more than one trust, a trustee shall not be liable under paragraph (1) except with respect to an act or omission of a trustee of a trust of which he is a trustee.
  (B) No trustee shall be liable under this subsection for following instructions referred to in Section 403(a)(1).
  1. Conference Report
  2. The allocation of trustee duties are discussed on pages 300-301 of the Congressional Conference Report.

  3. Interpretive Bulletins
    1. A plan fiduciary who knows of a breach committed by another fiduciary must take reasonable steps to remedy the breach, such as instituting a lawsuit, notifying the Department of Labor, or publicizing the breach. Mere resignation by the fiduciary as a protest against the breach is not sufficient. IB 75-5, Question FR-10.

Section 405(c)

(1) The instrument under which a plan is maintained may expressly provide for procedures -
  (A) For allocating fiduciary responsibilities (other than trustee responsibilities) among manned fiduciaries, and
  (B) For named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities (other than trustee responsibilities) under the plan.
(2) If a plan expressly provides for a procedure described in paragraph (1), and pursuant to such procedure any fiduciary responsibility of a named fiduciary is allocated to any person, or a person is designated to carry out any such responsibility, then such named fiduciary shall not be liable for an act or omission of such person in carrying out such responsibility except to the extent that -
  (A) The named fiduciary violated section 404(a)(1) -
    (i) With respect to such allocation or designation,
    (ii) With respect to the establishment or implementation of the procedure under paragraph (1), or
    (iii) In continuing the allocation or designation; or
  (B) The named fiduciary would otherwise be liable in accordance with subsection (a).
(3) For purposes of this subsection, the term "trustee responsibility" means any responsibility provided in the plan's trust instrument (if any) to manage or control the assets of the plan, other than a power under the trust instrument of a named fiduciary to appoint an investment manager in accordance with Section 402(c)(3).
  1. Conference Report
  2. General fiduciary duty allocation provisions are covered on page 302 of the Congressional Conference Report.

  3. Interpretive Bulletins
    1. [Allocation] Fiduciary responsibilities not involving management or control of plan assets may be allocated among named fiduciaries and may be delegated by named fiduciaries to others if the plan instruments so provide. IB 75-8, Question FR-12.
    2. [Allocation] If directors of an employer are the named fiduciaries of the plan, their liability can be limited by the procedures established in the plan instruments for allocating fiduciary responsibilities among named fiduciaries or for designating others to carry out fiduciary responsibilities. IB 75-8, Question D-4.
    3. [Allocation] Even if named fiduciaries allocate responsibilities or designate others to perform these functions, they are still liable for breaches in the establishment and implementation of the allocation or designation procedure. IB 75-8, Questions FR-13 and FR-14.
    4. [Delegation] Named fiduciaries cannot delegate authority or discretion to manage or control plan assets to anyone other than an investment manager as defined in Section 3(38). IB 75-8, Question FR-15.
  1. Advisory Opinions
    1. A named fiduciary with the duty to appoint, remove and monitor a plan's investment managers is not responsible for the day-to-day management of plan assets by the investment managers but must be prudent in appointing the investment managers and in continuing to retain them. AO 77-69/70.
  1. Court Decisions
    1. [Allocation] Fiduciaries are only liable for imprudent investment decisions made by an investment manager, who has been designated as such by the fiduciaries, if the fiduciaries fail to monitor adequately the performance of the investment manager. Brock v. Berman, 673 F. Supp. 634, 8 EBC 1689 (D.Mass. 1987).
    2. [Allocation] Even though a plan trustee has no authority for investment decisions, it cannot disavow itself of responsibility for such decisions, since it is still a fiduciary. However, under the allocation provisions of Section 405(c)(1), the trustee may, in fact, not be liable for such decisions. Leonard v. Drug Fair, Inc., No. 78-1335, Fed. Sec. L. Rep. (CCH) Para 97,144 (D.D.C. 1979).
    3. [Recordkeeping] A company was delegated by a bank trustee or custodian for self-directed IRA accounts the function of maintaining records and preparing appropriate reports required by Section 103 of ERISA. A company maintaining records necessary for the preparation of such reports is a plan fiduciary and must perform these functions with the degree of care set forth in Section 404(a)(1)(B). Redwood Bank v. QTA, Inc., No. C-79-1586, slip op. (N.D.Cal., Oct. 23, 1979).

Section 405(d)

(1) If an investment manager or managers have been appointed under section 402(c)(3), then, notwithstanding subsections (a)(2) and (3) and subsection (b), no trustee shall be liable for the acts or omissions of such investment manager or managers, or be under an obligation to invest or otherwise manage any assets of the plan which is subject to the management of such investment manager.
(2) Nothing in this subsection shall relieve any trustee of any liability under this part for any act of such trustee.
  1. Conference Report
  2. Investment manager appointment provisions are covered on pages -301-302 of the Congressional Conference Report.

  3. Regulations
   See the DOL plan assets ERISA Regulation 2510.3-101.

Prohibited Transactions

ERISA Sections 406, 407, 408, 414

Section 406(a)(1)

Except as provided in Section 408 [which contains the exemptions from the prohibited transactions restrictions]:
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 -
(A) Sale or exchange, or leasing, of any property, between the plan and a party in interest;
(B) Lending of money or other extension of credit between the plan and a party in interest;
(C) Furnishing of goods, services or facilities between the plan and a party in interest;
(D) Transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan; or
(E) Acquisition, on behalf of the plan, of any employer security or employer real property in violation of section 407(a) which contains the 10% limitation on the acquisition and holding of qualified employer securities and real property.
  1. Statute
  2. Investments in collectibles are generally prohibited by Section 408(m) of the Internal Revenue Code and PTE 91-55 .

  3. Conference Report
  4. These prohibited transaction provisions are discussed on pages 306-309 and 316-320 of the Congressional Conference Report.

  5. Regulations
  6. DOL ERISA Regulation 2510.3-101 defines plan assets.

  7. Prohibited Transaction Class Exemptions (PTE)
    1. [Broker] The provision of brokerage services to IRAs and to Keogh plans to which Title I of ERISA is inapplicable is not subject to the prohibited transaction provisions of Title I of ERISA. However, such IRAs and Keogh plans remain subject to the prohibited transaction provisions of Title I of ERISA. Final PTE C 79-1.
    2. [Coins and Collectibles] PTE 91-55 permits IRA accounts to invest in American Eagle gold coins.
    3. [Broker] Securities broker-dealers regularly provide research, information and advice concerning securities and also effect agency transactions for the purchase or sale of securities in the ordinary course of their business as broker-dealers, and the provision of a combination of such services by a fiduciary with regard to employee benefit plans would constitute prohibited transactions under ERISA and the Code. Proposed Extension of Paragraph 1(a) of PTE C 75-1; Final PTE C 78-10.
    4. [Foreign Exchange] A bank fiduciary may use its own services (or those of an affiliate) to invest, on a non-discretionary basis, in foreign currencies and foreign currency options, subject to a number of conditions. See PTE 94-20.
    5. [Loan by Union Plan to Provide Projects for Union Employers] A loan by a multiemployer plan or a multiple employer plan to an owner of real property who is not a party in interest or a disqualified person to such plan where the loan is for the purpose of enabling such property owner to make construction improvements on such property, and the property owner contracts with an employer participating in the plan to make such construction improvements, is not a prohibited transaction under Section 406(a) of ERISA and Section 4975(c)(1)(A) - (D) of the Code. However, such a loan may give rise to a prohibited transaction if, for example, the loan is made in the context of an arrangement where a specific participating employer is to furnish a portion of the construction, and such employer has a controlling influence over the plan's decision to make the loan. Final PTE C 76-1.
    6. [Office Space] In some instances, a multiemployer plan or a multiple employer plan will secure office space and administrative services jointly with a participating employee organization, employer or employer association, or with another multiemployer plan or multiple employer plan that is a party in interest or disqualified person to the plan and will share the costs of securing such office space or administrative services on a pro-rata basis based on each party's use of such space or services. Such joint use of office space or administrative services does not constitute a prohibited transaction. However, if a multiemployer plan or a multiple employer plan independently secures for its own use office space or administrative services and furnishes part of such office space or administrative services to a party in interest or disqualified person, such transactions are prohibited transactions. Final PTE C 76-1.
    7. [Securities Lending] A securities lending service, pursuant to which a bank-trustee will lend securities of plans for which it serves as trustee to broker-dealers for an additional fee from the plan, may contravene Section 406(b). AO 79-11. But also see PTE 82-63.
    8. [Securities Lending] Payment to a party in interest of any commission, finder's fee or other compensation for services in connection with the effecting of a loan of securities by the plan to a broker-dealer, bank or other person would be a prohibited transaction. Proposed PTE I D-762. But also see PTE 82-63.
  1. Interpretive Bulletins
    1. [Plan Assets] In general, the investment by a plan in securities of a corporation will not be considered to be an investment in the underlying assets of the corporation. The assets of the corporation are not plan assets so subsequent transactions between a party in interest and the corporation will not be prohibited. This general proposition is consistent with Section 401(b)(1). However, this does not mean that such an investment may not sometimes constitute an indirect prohibited transaction. For example, if a plan invests in a corporation pursuant to an arrangement whereunder it is expected that the corporation will engage in a transaction with a party in interest, such arrangement will be a prohibited transaction. IB 75-2 (This IB contains several examples).
    2. [Contributions, In-Kind] Contributions of non-cash ("in-kind") assets to a defined benefit plan is a prohibited transaction. In-kind contributions to a defined contributions or welfare benefit plan may be a prohibited transaction, depending on the facts and circumstances and provisions of the plan. The basic determinant is whether the in-kind contributions represents an attempt to lessen a present or future obligation to make cash contributions to a plan. IB 94-3.
    3. [Bonding of Fiduciaries] The purchase of a bond required under Section 412 is not a prohibited transaction. IB 75-5, FR-9.
    4. [Payment of Benefits] The mere payment of money to which a participant or beneficiary is entitled, at the direction of the participant or beneficiary, to a party in interest does not contravene Section 406(a)(1)(D). IB 78-1.
  1. Advisory Opinions
    1. [Alienation of Benefits] Because Section 406 prohibits both direct and indirect transactions, a trustee to whom the limitation on compensation in Section 408(c)(2) applies could not assign his rights to compensation for services rendered to a plan to a party in interest, such as an employer. Therefore, the trustee could not submit a request for compensation to the fund designating his employer as payee on checks issued. WSB 79-92.
    2. [Alienation of Vested Benefits] Withholding of benefits from a plan participant and transfer of those benefits to a party in interest in satisfaction of a debt owed by the participant to that party in interest is a prohibited transaction. AO 76-99.
    3. [Appointment] The appointment of a bank that is a creditor of the entity maintaining the plan as trustee of the plan assets is not a prohibited transaction. WSB 77-14.
    4. [Appointment] The appointment of a party in interest as trustee, and the transfer of plan assets to the trustee pursuant to such appointment, does not constitute a prohibited transaction under Section 406(a)(1)(D) and does not contravene Sections 406(b)(1) or 406(b)(3). WSB 77-14.
    5. [Bank Servicer] The owner of a trust company that acts as a fiduciary to employee benefit plans that renders certain services for the trust company, but not for the plans, is not subject to the prohibitions of Section 406(a), since the services would not be a transaction between the plan and a party in interest. AO 82-55A.
    6. [Bank Stock - Purchase/Retention/Sale of Fiduciary Bank/BHC Stock]
  • General Discretionary Rule - An ERISA plan may not invest in the stock of a fiduciary bank if the bank has discretion over the transaction. The discretionary retention of such stock would also be prohibited. Non-discretionary purchases, sales, retentions are permitted. See 1980 letter from DOL to OCC.
  • General Non-Discretionary Rule - An ERISA plan may invest in the stock of a fiduciary bank or its bank holding company if the bank has no discretion over the investment. AO 92-23A.
  • Self-Directed Purchases - Permits self-directed accounts to purchase stock (including treasury stock) of the fiduciary bank or its holding company. AO 88-9.
  • Mutual Conversions - Initial Public Offerings - Permits self-directed accounts to purchase stock of the fiduciary bank (or its holding company) in an initial public offering (IPO) or on conversion of a mutual institution to a stock institution. AO 88-28.
    1. [Bonds - Rights] The sale or assignment of rights to debentures by a trust to a party in interest is a prohibited transaction. AO 76-72.
    2. [Collective Funds] The investment of plan assets in a commingled fund (for example, a qualified group trust) maintained by a bank trustee causes the assets of such commingled fund to be treated as assets of the plan. Consequently, a purchase or bolding of a master note (i.e, a nonnegotiable obligation issued by a finance company, the principal amount of which fluctuates on a daily basis depending on how much money the fund desires to loan the issuer) by the commingled fund in which the plan has an interest from a subsidiary of the corporation maintaining the plan constitutes a loan from the plan to the subsidiary in violation of Section 406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Code. PLR 7913114; PLR 7913116; Proposed PTE C 784.
    3. [Collective Funds] The mere transfer of assets between a qualified group trust (CIF) and plans invested therein, and the corresponding increase or decrease in qualified group trust units credited to the plans, are intra plan transactions so long as the group trust is a qualified trust under Section 401(a) of the Code and the transfers are within the terms of the plan. Accordingly, such transactions do not fall within the restrictions of Section 406 of ERISA or Section 4975(c)(1) of the Code. PLR 7913116.
    4. [Collective Funds - Conversion to Mutual Funds] The conversion of an ERISA collective investment fund would be a prohibited transaction in violation of Section 406. PTE 77-4 would not provide relief for such a conversion. See the 1994 letter from DOL to OCC.
    5. [Compensation] The receipt of compensation by a fiduciary from a plan is a prohibited transaction if the fiduciary is already receiving full-time compensation from the employer maintaining the plan. AO 78-08.
    6. [Contributions - In-Kind] The contribution to the plan by the employer of a condominium owned by the owner, in lieu of making its contribution to the defined benefit plan, in accordance with the requirements for properly funding the plan, constitutes a prohibited sale or exchange of property between the plan and a party in interest pursuant to Section 406(a)(1)(A).
    7. Section 406 provides that a transfer of real or personal property by a party in interest to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or a lien that the plan assumes or it is subject to a mortgage or similar lien that a party in interest placed on the property within the ten year period ending on the date of the transfer. The transfer of an option to purchase a condominium by a party in interest to the plan followed by the exercise of the option by the plan may also constitute a violation of Section 406(a)(1)(A). AO 81-69A.

    8. [Deposits] The investment of plan assets in credit union share accounts, at the direction of the plan participants and beneficiaries, is not a prohibited transaction. AO 76-38.
    9. [Deposits] The investment of the assets of a noncollectively bargained multiple employer plan covering employees of banks, in savings accounts and certificates of deposit of banks that are contributing employers, constitutes a prohibited transaction under Section 406(a) and may also be prohibited under Section 406(b)(1) and (2), because members of the administrative board of the plan, which directs plan investments, are officers and employees of contributing employer/banks.
    10. However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1), and 406(b)(2) for the investment of plan assets in the deposits of certificates of deposit of a bank that is a plan fiduciary or party in interest, if the requirements of DOL ERISA Regulations Section 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the banks in which deposits may be made. The specifications may be made in the plan by amendment retroactive to November 1, 1977. AO 79-25.

    11. [Estates] The purchase of real property from the estate of the sole shareholder of a corporation contributing to a plan is not a prohibited transaction even though one of the executors of the estate formerly was a plan trustee. AO 76-420.
    12. [Fees - Own-Bank Plan] A bank is not prohibited from serving as trustee for a plan maintained for the bank's employees where it receives no compensation from the plan for its trustee services [Emphasis added]. AO 79-49.
    13. [Fees] The reimbursement of, or payment to, fiduciaries of expenses properly and actually incurred in settlement of pending or threatened litigation by a plan, pursuant to indemnification provisions that do not contravene ERISA, is not a prohibited transaction. AO 77-66/67.
    14. [Investment Advisor] The provision of investment advisory, services by a corporation to a plan is not a prohibited transaction even though the corporation also provides such services to other clients who may be parties in interest to the plan. AO 77-44.
    15. [Investment Advisor] To the extent that a party renders investment performance measurement services to a plan, providing no more than quantitative measurement and ranking of a plan's investment portfolio and/or management performance based upon objective, reasonable and relevant criteria that are uniformly applied, such service would not constitute the rendering of investment advice. However, where the service provider adopts, applies or modifies performance or portfolio indices in such a way that a plan is furnished with a format for decision making that is designed to influence the plan's continued participation in a particular investment program, the service would constitute investment advice. AO 94-03.
    16. [Leases - Sponsor] The leasing by a plan of improved real property to the employer maintaining the plan is a prohibited transaction pursuant to Sections 406(a)(1)(A), (C), (D) and (E) of ERISA and Sections 4975(c)(a)(1),(C) and (D) of the Code.  In addition, since any property leased to an employer is "employer real property," as defined in Section 407(d)(2) of ERISA, if such property is not "qualifying employer real property" within the meaning of Section 407(d)(4) of ERISA, the holding of such property by the plan is a prohibited transaction pursuant to Sections 406(a)(2) and 407(a)(1) of ERISA. Also, to the extent that the employer may be a fiduciary to the plan, as defined in Section 3(21)(A) of ERISA and Section 4975(e)(3) of the Code, the lease arrangement may be a prohibited transaction pursuant to Section 406(b)(1) and (2) of ERISA and Section 4975(c)(1)(E) of the Code. Proposed PTE F 192.
    17. [Loans - Common Borrower] If a loan is made by a plan to a person in order to encourage that person to do business with the employer, the transaction would be prohibited under Sections 406(a)(1)(D) and 406(b). WSB 79-63.
    18. [Loan by Construction Union Plan to Provide Employment for Union Members] Because it will not opine on factual circumstances, the Department will not opine on construction industry trustees' direction to their investment manager to invest a specified amount of plan assets in construction mortgages within the jurisdiction of the union whose members are plan participants. The Department states, however, that it would not be inconsistent with the requirements of Sections 403(c) and 404 for plan fiduciaries to select an investment course of action that reflects non-economic factors so long as application of such factors follows the primary consideration of a broad range of investment opportunities that are economically equally advantageous. Arrangements whereby funds of plans are invested by the fiduciary in transactions that indirectly create employment opportunities and compensation for employee services necessarily require an examination to determine if an indirect use of plan assets for the benefit of a party in interest is involved. AO 85-36A.
    19. [Loan by Union Plan to Provide Projects for Union Employers] If a multiemployer plan acquires unimproved real property and arranges for the construction of building structures on such property for the purpose of providing office space for the plan with building contractors and subcontractors some or all of whose employees are participants or beneficiaries of the plan, the arrangement between the plan and such building contractors and subcontractors would constitute prohibited transactions. Proposed PTE I 76-2.
    20. [Loans - Sponsor] Where a plan has a loan outstanding to X Corp. and the employer with respect to the plan acquires a majority or controlling interest in X Corp., the loan would become a prohibited, indirect extension of credit to the employer, in addition to being a direct prohibited extension of credit to X Corp. However, if the loan transaction is contemplated before the acquisition, the loan would not be a prohibited transaction. AO 79-37.
    21. [Loan Guarantee] A guarantee by a party in interest of a loan by a plan to a third party constitutes an extension of credit between the plan and the party in interest. If such loan was made pursuant to a binding contract in effect on July 1, 1974, it may be exempt under Section 414(c)(1), even if the loan constitutes a nonqualifying security under Section 407. See DOL ERISA Regulation Section 2550.407a-1(b).
    22. [Mutual Fund Conversion from Collective Investment Fund] The conversion of an ERISA collective investment fund would be a prohibited transaction in violation of Section 406. PTE 77-4 would not provide relief for such a conversion. See 1994 letter from DOL to OCC.
    23. [Pooled Fund - Seed Money] The transfer by an insurance company of seed money invested by it in separate investment accounts back to the general account of the insurance company would not be treated as assets of a plan that have invested in the separate accounts and, therefore, the insurance company's redemption of its participation units in the separate accounts does not constitute a violation of the provisions of Sections 404(a)(1)(A) and (D). AO 83-38A.
    24. [Sale of Assets to Insider] The sale of certain parcels of real property by a profit-sharing plan to the majority shareholder of the employer maintaining the plan and to a corporation 50% or more of which is owned by such majority shareholder would constitute prohibited transactions pursuant to Section 406(a)(1)(A) and (D) of ERISA and Section 4975(c)(1)(A) and (D) of the Code. In addition, if the majority shareholder has the power to appoint and remove the plan trustee, such sales may be prohibited transactions under Section 406(b)(1) and (2) of ERISA and Section 4975(c)(1)(E) of the Code. Proposed PTE I 492.
    25. [Stock - Sponsor] The purchase of common stock of the employer maintaining the plan by the employer from the plan is a prohibited transaction (AO 79-23), even if the purchase is made pursuant to a public tender offer (AO 77-48.)
    26. [Sweep] Scan and sweep services by a bank for plans for which it provides fiduciary services and for which it is paid a separate fee would be exempt from any of the prohibitions of Section 406(a) if the conditions of Section 408(b)(2) are met. The question of what constitutes a reasonable service, a reasonable contract or arrangement, and reasonable compensation is inherently factual in nature, and not subject to opinion.

      A Section 408(b) violation would be involved if the bank, as fiduciary, exercised its authority, control or responsibility that makes it a fiduciary to cause the plan to enter into a transaction involving the provision of services when such fiduciary has an interest in the transaction that may affect the exercise of its judgment as a fiduciary. Therefore, to the extent the bank would direct the utilization of the scan and sweep services and receive any fee therefore, there would be a per se violation of Section 408(b). However, if the bank does not exercise such authority, but the decision is made by the plan sponsor, no violation would exist. AO 88-02A.

  1. Court Decisions
    1. [General] ERISA Section 406, which prohibits fiduciaries from causing a plan to engage in certain specified transactions, evinced the Congressional desire to prevent transactions that offer a high potential for loss of plan assets and for insider abuse; and to prevent a trustee from being put in a position where he has dual loyalties. McDougall v. Donovan 552 F.Supp. 1206, 3 EBC 2385 (N.D.Ill. 1982).
    2. [General] The question of whether ERISA has been violated does not depend on whether any harm results from the transaction. Congress was concerned in ERISA to prevent transactions that offered a high potential for loss of plan assets or for insider abuse. The fact that a prohibited loan is or may be ultimately repaid does not render the loan lawful. Marshall v. Kelly, F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978); Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979); Marshall v. Dekeyser, 485 F.Supp. 629, 1, EBC 1898 (W.D.Wis. 1979).
    3. [General] ERISA Section 406(a) prohibits a fiduciary from causing a plan to enter into transactions with parties whom "he knows or should have known" are parties in interest to the plan. A fiduciary must act with prudence in investigating whether a party-in-interest relationship exists. In the case of a significant transaction, generally for the fiduciary to be prudent he must make a thorough investigation of the other party's relationship to the plan to determine if he is a party in interest. In the case of a normal and insubstantial day-to-day transaction, it may be sufficient to check the identity of the other party against a roster of parties in interest that is periodically updated. Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
    4. [General] Congress did not intend to exclude from prohibitions under Section 406 transactions that have independent business purposes, just as it did not exclude transactions that are fair under some independent measure. Congressional intent to eliminate all transactions, with even the potential to bias the independent judgment of plan fiduciaries, must be followed. McDougall v. Donovan 552 F.Supp. 1206, 3 EBC 2385 (N.D.Ill. 1982).
    5. [General] Section 406 of ERISA does not create a per se prohibition against plan fiduciaries with dual loyalties acting on behalf of the plan. Donovan v. Bierwirth, 538 F.Supp. 463, 2 EBC 2145 (E.D.N.Y. 1981).
    6. [Effective Date] Actions by fiduciaries occurring after 1974 are not insulated from ERISA coverage merely because their roots can be traced to an event prior to the effective date of ERISA. Marshall v. Craft, 463 F.Supp. 493 (N.D.Ga. 1978).
    7. [Compensation] The critical analysis under Section 406, regarding a transaction with a party in interest that is exempted under Section 408, is whether the party in interest receives more than reasonable compensation. Brock v. Robbins 830 F.2d 640, 8 EBC 2489 (7th Cir. 1987).
    8. [Compensation] The payment by a multiemployer plan of rent for an aircraft leased from a party in interest in an amount in excess of the value received by the multiemployer plan in utilizing the aircraft allegedly constitutes a prohibited transaction under Section 406(a)(1)(D). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
    9. [ESOP] Under Section 406(a)(1)(B), one transaction normally prohibited is the lending of money or other extension of credit between the plan and a party in interest; however, loans to employee stock ownership plans are exempt from such prohibitions. Allen v. Katz Agency, Inc. Employee Stock Ownership Plan, 677 F.2d 193, 3 EBC 1352 (2d Cir. 1982).
    10. [Ignorance] Where trustees did not inspect complete agreement as drafted by counsel, and thus were not aware that part of the plan would result in the use of plan assets to benefit a party in interest, they violated ERISA Section 406(a)(1). Dimond v. Retirement Plan, 582 F. Supp. 892, 4 EBC 1457 (W.D. Pa. 1983).
    11. [Leases] The lease of an airplane by a multiemployer plan from a party in interest allegedly constitutes a prohibited transaction under Section 406(a)(1)(A). Usery v. Wilson, et al, No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
    12. [Loans] Fiduciaries cannot act as both borrowers and lenders as these are parties whose interests are adverse; fiduciaries acting on both sides of a loan transaction cannot negotiate the best terms for either party. Davidson v. Cook, 567 F.Supp. 225, 4 EBC 1816 (E.D.Va. 1983), aff'd, 734 F.2d 10 (4th Cir.), cert. denied, 469 U.S. 899 (1984).
    13. [Loans to Plan Sponsor] An employer's borrowing of money from the fund violates the prohibition under ERISA Section 406 regarding the lending of money between a plan and a party in interest. Dependahl v. Falstaff Brewing Corp., 491 F.Supp. 1188, 30 Fed. Rul. Serv.2d(Callahan) 564 (E.D.Miss. 1980), aff'd in part, rev'd in part, 653 F.2d 1208 (8th Cir.), cert.
    14. [Loans] The phrase "reasonable rate of interest" within the meaning of ERISA Section 406(a)(1)(B) does not equate to the term "prevailing or market rate of interest." Thus, if the other requirements of Section 406(a)(1) are met, a pension fund may charge interest rates lower than the prevailing rate on mortgage loans made to plan participants. Evidence that a pension fund had charged a lower interest rate was insufficient to establish that the loans did not "bear a reasonable rate of interest" and were accordingly not exempted from the prohibition of ERISA Section 406(a) against making loans to plan participants. Brock v. Walton, 794 F.2d 586,7 EBC 1769 (11th Cir.), reh'g denied, 802 F.2d 1399 (11th Cir. 1986) (en banc).
    15. [Loans] A loan of money by a multiemployer plan to a party in interest allegedly constitutes a prohibited transaction under Section 406(a)(1)(B). Usery v. Wilson, et al, No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
    16. [Loans] Dissolving the improper party-in-interest relationship prior to the execution of a loan did not preclude the transaction from being violative of ERISA Section 406 when the loan agreement already existed at the time of divestiture. M&R Investment Co., Inc. v. Fitzsimmons, 685 F.2d 283, 3 EBC 1835 (9th Cir. 1982).
    17. [Loans] A loan by a multiemployer plan to a party in interest for the purpose of enabling the party in interest to remove preexisting liens on an aircraft that the party in interest wished to acquire free of encumbrances allegedly constitutes a prohibited transaction under Section 406(a)(1)(D). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
    18. [Loans] Profit-sharing plan trustees violated ERISA's prohibited transactions provisions by maintaining pre-ERISA loans to employer-sponsor and to one of the trustees after law's effective date, where one loan was made without security with an oral promise to repay, since loans' terms were not at least as favorable to the plan as arm's length transaction would have been. Donovan v. Bryans, 566 F. Supp. 1258, 4 EBC 1816 (E.D.Pa. 1983).
    19. [Mergers & Acquisitions] Fiduciaries of a trust, containing assets of corporate employee pension benefits plan, violated ERISA's prohibited transactions in Section 406 when they used the assets to finance another corporation's obligation under an acquisition agreement requiring the purchase of shares of stock held by the trust in another corporation. Sandoval v. Simmons 622 F.Supp. 1174, 6 EBC 2161 (D.C. Ill. 1985).
    20. [Mergers & Acquisitions] ERISA Section 406(a)(1)(D) and (b)(1) should be read broadly as a gloss on the duty of loyalty required by Section 404 in light of the Congressional concern with protection of plan beneficiaries and should be read to cover action of trustee who buys shares in target corporation in order to assist either target's management or raider in its quest for corporate control or a control premium. Leigh v. Engle, 727 F.2d 113, 4 EBC 2702 (7th Cir. 1984).
    21. [Provide Benefits] The payment of rent on behalf of the widow of a former plan trustee is a prohibited transaction under Section 406(a)(1)(D) even though the payment was morally commendable and was not made for the personal gain of plan fiduciaries. Marshall v. Cuevas, 1 EBC 1580 (D.P.R. 1979).
    22. [Successor Trustee] ERISA limits a fiduciary's liability for breach of duty to those breaches committed during his tenure; however, under Section 406 of ERISA a successor trustee has a duty to dispose of prior investments violative of ERISA upon assuming his responsibilities. McDougall v. Donovan 552 F.Supp. 1206, 3 EBC 2385 (N.D.Ill. 1982).
    23. [Unions] As Section 406 of ERISA seeks to protect against influences exerted by all parties in interest, Congress intended to prohibit dealings between a plan and any union whose members are among the beneficiaries of the plan. McDougall v. Donovan 552 F.Supp. 1206, 3 EBC 2385 (N.D.Ill. 1982).

Section 406(a)(2)

Except as provided in Section 408 [which contains the exemptions from the prohibited transaction restrictions]:
No fiduciary who has authority or discretion to control or manage the assets of a plan shall permit the plan to hold any employer security or real property if he knows or should know that holding such security or real property violates section 407(a) which contains the 10% limitation on the acquisition and holding of qualifying employer securities and real property.
  1. Conference Report

The prohibited transaction provisions are discussed on pages 306-309 and 316-320 of the Congressional Conference Report.

Section 406(b)(1)

A fiduciary with respect to a plan shall not -
(1) Deal with the assets of the plan in his own interest or for his own account,
  1. Conference Report
  2. This prohibition is covered on page 309 of the Congressional Conference Report.

  3. Regulations

No regulations have been issued yet. However, the regulations under Section 408(b)(2) amplify this prohibition.

    1. This prohibition is imposed to deter fiduciaries from exercising the authority, control or responsibility that makes such persons fiduciaries when they have interests that may conflict with the interests of the plans for which they act. ERISA Regulation 2550.408b-2(e)(1).
    2. A fiduciary does not engage in an act described in Section 406(b)(1) if the fiduciary does not use any of the authority, control or responsibility that makes such person a fiduciary to cause the plan to pay additional fees for a service furnished by such fiduciary or by a person in which such fiduciary has an interest that may affect the exercise of such fiduciary's best judgment as a fiduciary. DOL ERISA Regulation 2550.408b-2(e)(2).
    3. The regulation cited above contains several important examples. DOL ERISA Regulation 2550.408b-2(f). Some of the examples, however, only deal with Section 406(b)(1) and not with Sections 406(b)(2) and 406(b)(3). Therefore, even if an example indicates that there is no Section 406(b)(1) prohibition, there may be a Section 406(b)(2) or (3) prohibition.
    4. For a definition of plan assets, see DOL ERISA Regulation 2510.3-101.
  1. Advisory Opinions
    1. [General] A fiduciary does not engage in a violation of Section 406(b)(1) unless he uses his fiduciary authority to benefit himself or a related party. WSB 79-20; PLR 7826047; PLR 7826048; PLR 7826049; Proposed PTE I 492; Proposed Extension of Paragraph 1(a) of PTE C 75-1.
    2. [General - Discretion Required] A fiduciary to a plan, by reason of rendering investment advice for a fee or other compensation, shall not be deemed to be a fiduciary regarding any plan assets to which such person does not have discretionary authority, discretionary control or discretionary responsibility, does not exercise any authority or control and does not render investment advice for a fee or other compensation. Thus, a sale of assets by the corporate trustee and investment manager, but of assets not under the control of that fiduciary, does not involve a possible prohibited transaction under Section 406(b). Also, where a factual analysis confirms that at the time of a transaction, the plan, as seller, and the purchaser had no party-in-interest relationship to one another, the sale cannot constitute a violation of Section 406(a)(1)(A) through (D). AO 81-20A.
    3. [General] If a fiduciary uses the authority, control and responsibility that makes him a fiduciary to cause the plan to enter a transaction involving the provision of services when such fiduciary has an interest in the transaction that may affect the exercise of his best judgment as a fiduciary, a transaction described in Section 406(b) would occur. That transaction would be deemed to be a separate transaction from the transaction involving the provision of services and would not be exempted under Section 408(b)(2). Also, questions of what constitutes a necessary service, a reasonable contract or arrangement, and reasonable compensation are inherently factual in nature and will not be the subject of advisory opinions.

Where a firm is an investment manager to individual employee benefit plans, the initial appointment of that firm as investment manager of a master trust and/or trustees of the master trust by independent plan fiduciaries would not cause the investment manager or trustees to violate Section 406(b)(1) or (2) as long as those persons exercise none of the authority, control or responsibility that makes them fiduciaries to cause the plan to make such appointments.

  • [Collective Investment Funds] Also, Section 406(a)(1) does not apply to any transaction between a plan and a common or collective trust fund maintained by a bank or trust company supervised by a state or a federal agency if (a) the transaction is a sale or purchase of an interest in the fund, (b) the bank or trust company receives no more than reasonable compensation, and (c) the transaction is expressly permitted by the instrument under which the plan is maintained or by a fiduciary who has authority to manage and control the assets of the plan.
  • [Deposits] Section 408(b)(4) provides that the prohibitions of Section 406 shall not apply to the investment of all or a part of plan assets and deposits that bear a reasonable rate of interest in a bank or similar financial institution supervised by the United States of America or by a state if such bank or other institution is a fiduciary of the plan and if (a) the plan covers only employees of such bank or other institution or affiliates of such bank or institution or (b) such investment is expressly authorized by a provision of the plan or by a fiduciary who is expressly empowered by the plan to so instruct the trustee regarding such an investment.
  • [Loan to Provide Employment for Union Members] Finally, the Department of Labor, on its own, notes that one of the collective funds that was the subject of the request for opinion is designated as the union construction fund. The Department indicates that a decision to make an investment may not be influenced, for example, by a desire to stimulate the construction industry and generate employment unless the investment, when judged solely on the basis of the economic value to the plan, would be equal to or superior to alternate investments available to the fund. AO 82-51A.
    1. [General] The inquiry concerning whether a fiduciary has violated ERISA Section 406(b)(1) is not limited to the initial decision by the plan regarding retention of the fiduciary to provide additional services. At all times, such fiduciary may make no decision on behalf of the plan (or in any way use his authority or control) to cause the plan to make a decision which would have the effect of personally benefiting himself or any other person in which such fiduciary has an interest.
    2. However, the potential for a prohibited act of self-dealing in violation of ERISA Section 406(b)(1) may be prospectively avoided through the careful application, in effect as well as in form, of Example (7) of ERISA Regulations Section 2550.408(b)-2(f) (for example, the trustee must physically absent himself from all consideration of the matter and cannot any of his authority or control to influence the plan's decision.) WSB 79-20.

    3. [Bank Board Membership] Where an individual is a fiduciary to a plan and where the individual serves as a member of the board of directors of a bank that also serves as a fiduciary to the plan, decisions made by the bank's board of directors regarding plan investments do not necessarily constitute Section 406(b) violations by the individual/director if he absents himself from any arrangements, agreements or understanding; removes himself from all board consideration of these decisions; and does not otherwise exercise any authority, control or responsibility with regard thereto. Provided, however, that if the board itself has an interest in the transaction that could alter or affect its judgment, this would constitute a per se violation under Section 406(b). AO 86-11A.
    4. [Bank Custodian - Board Membership] The investment of plan assets in securities of the bank that is custodian, at the direction of a trustee who is also a director of the bank, may be a prohibited transaction under Section 406(b)(1). AO 76-76.
    5. [Bank Holding Company Affiliate Use] The appointment of a second tier subsidiary and/or a division of a corporation to perform a fiduciary or nonfiduciary service for a plan, for which the second tier subsidiary or division acts as a fiduciary, would not constitute an act of self-dealing by the fiduciary provided that the appointment is made by a fiduciary who is independent of and unrelated to the parent-subsidiary group. PLR 7826047.
    6. [Bank Holding Company Affiliate Use] A second tier subsidiary, acting in its capacity as plan trustee, retained a division of the parent of the first tier subsidiary to provide it with investment advice and related advisory services to the trust for which it was acting as trustee. The services performed by the division were clearly within the existing responsibilities of the second tier subsidiary. The second tier subsidiary did not delegate any of its responsibilities as trustee because it remained fully responsible for managing the plan's investments. The fees charged by the second tier subsidiary included payment for investment advice as well as for custodial services. The second tier subsidiary's fee was not affected by reason of its retaining the division. Rather, at its own expense, the second tier subsidiary compensated the division for the services rendered to it. The second tier subsidiary did not engage in an act of self-dealing under Code Section 4975(c)(1)(E) when it appointed the division to provide investment advice. PLR 7826048.
    7. [Brokerage Services] If a plan fiduciary effects securities transactions on behalf of the plan and performs functions incidental to the effecting of such transactions, such transactions would be prohibited by ERISA and the Code unless, under the particular facts and circumstances surrounding the transactions, they do not constitute acts of self-dealing under ERISA Section 406(b)(1) and Code Section 4975(c)(1)(E). Proposed Extension of Paragraph 1(a) of PTE C 75-1.
    8. [Collective Investment Funds] Also refer to General Advisory Opinions above for AO 82-51A.
    9. [Collective Investment Funds] It is a violation of Section 406(b) when a company maintaining a pension advisory and consulting service, dealing in establishing investment objectives, evaluation, recommending managers, and monitoring performance, makes recommendations with regard to investments in collective trust funds to which said party has a fiduciary role, if the recommendations are a primary basis for plan investments. AO 84-04A.
    10. [Commissions] This advisory opinion involved transactions by a licensed stock brokerage firm, which was the plan sponsor and involved mutual fund investments made by the plan. The documentation between the plan sponsor and the plan provided that the sponsor would agree to receive and hold all commissions as agent for the trustee on behalf of the plan and to pay the commissions to the plan within 30 days after receipt thereof.
    11. The Department of Labor ruled that the receipt of brokerage commissions by a plan fiduciary from a transaction involving assets held by the fiduciary as agent for the plan would not constitute a violation of ERISA if the fiduciary had no right, title or interest in the proceeds passed to the fiduciary, the commissions were returned to the plan in the ordinary course of business, and the fiduciary does not benefit in any manner from the holding of the money. AO 81-90A.

    12. [Compensation] The receipt of compensation by a fiduciary from a plan is a prohibited transaction if the fiduciary is already receiving full-time compensation from the employer maintaining the plan. AO 78-08.
    13. [Compensation] The appointment by a plan trustee of his secretary as plan administrator may violate Section 406(b)(1). Plan fiduciaries are prohibited from dealing with plan assets in their own interest or for their own account. If the compensation paid by the plan for administrative services, in fact, serves to compensate the trustee's secretary for the time spent in the performance of her secretarial duties, a violation of Section 406(b)(1) might occur. AO 77-84.
    14. [Deposits] Also refer to General Advisory Opinions above for AO 82-51A.
    15. [Deposits] The investment of the assets of a plan covering employees of banks, in savings accounts and certificates of deposit of banks that are contributing employers, constitutes a prohibited transaction under Section 406(a) and may also be prohibited under Section 406(b)(1) and (2) because members of the administrative board of the plan, which directs plan investments, are officers and employees of contributing employer/banks.
    16. However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1) and 406(b)(2) for the investment of plan assets in the deposits or certificates of deposit of a bank that is a plan fiduciary or party in interest, if the requirements of ERISA Regulations Section 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the banks in which deposits may be made. The specifications may be made to the plan by amendment retroactive to November 1, 1977. AO 79-25.

    17. [Fees, Incentive] Payment of an incentive fee pursuant to appropriate contractual relationship between an investment manager (fiduciary) and the plan would not, in and of itself, violate Section 406(b)(1). The amount of compensation that the manager earns depends solely on the changes in value of the securities in the individual accounts and, therefore, the manager would not be exercising any of its fiduciary authority or control to cause the plan to pay an additional fee.
    18. Moreover, it does not appear that the manager would be acting on behalf of or representing a person whose interests are adverse to the plan merely because it enters into an incentive fee arrangement. However, the Department notes that incentive fee arrangements could, under certain facts and circumstances, violate both Sections 406(a) and 406(b), as well as Section 404(a). Thus, the plan fiduciary must act prudently in deciding to enter into an incentive compensation arrangement with an investment manager, as well as the negotiation of the specific formula under which the compensation will be paid. The Department's position is that the fiduciary, prior to a decision to enter into an incentive compensation arrangement, must fully understand the compensation formula and the risks associated with this manner of compensation and have all relevant information pertaining thereto available to it. Further, the plan fiduciary must be capable of periodically monitoring the actions taken by the manager in the performance of its investment duties. AO 86-20A; accord AO 86-21A.

    19. [Float] The ancillary services exemptions (§ 408(b)(2) and 408(b)(6)) do not include the float earned by the fiduciary bank from a demand deposit account to the extent that it is reasonably possible to earn a return on such funds. Retention of float would be permissible if it was a part of the bank's overall compensation from the plan and if the bank had made appropriate disclosures regarding the use of float. Failure to comply would result in a violation of ERISA Section 406(b)(1). AO 93-24A.
    20. [Leases to Sponsor] The leasing by a plan of improved real property to the employer maintaining the plan is a prohibited transaction pursuant to ERISA Section 406(a)(1)(A), (C), (D) and (E) and Code Section 4975(c)(1)(A), (C) and (D). In addition, since any property leased to an employer is employer real property as defined in ERISA Section 407(d)(2), if such property is not qualifying employer real property within the meaning of ERISA Section 407(d)(4), the holding of such property by the plan is a prohibited transaction pursuant to ERISA Sections 406(a)(2) and 407(a)(1). Also, to the extent that the employer may be a fiduciary to the plan as defined in ERISA Section 3(21)(A) and Code Section 4975(e)(3), the lease arrangement may be a prohibited transaction pursuant to ERISA Section 406(b)(1) and (2) and Code Section 4975(c)(1)(E). Proposed PTE I 192.
    21. [Loan by Construction Union Plan to Provide Employment for Union Members] Also refer to General Advisory Opinions above for AO 82-51A.
    22. [Loans] If a loan is made by a plan to a person in order to encourage that person to do business with the employer, the transaction would be prohibited under Section 406(a)(1)(D) and 406(b). WSB 79-63.
    23. [Sale to Insider] The sale of certain parcels of real property by a profit-sharing plan to the majority shareholder of the employer maintaining the plan and to a corporation 50% or more of which is owned by such majority shareholder would constitute prohibited transactions pursuant to Section 406(a)(1)(A) and (D) of ERISA and Section 4975(c)(1)(A) and (D) of the Code. In addition, if the majority shareholder has the power to appoint and remove the plan trustee, such sales may be prohibited transactions under Section 406(b)(1) and (2) of ERISA and Section 4975(c)(1)(E) of the Code. Proposed PTE I 492.
    24. [Stock - Exchanges] An exchange of securities held by a stock bonus plan in connection with a reorganization is not a prohibited transaction. WSB 78-29.
  1. Court Decisions
    1. [General] ERISA Section 406(b) codifies the principle that ERISA fiduciaries owe the plan, its participants and its beneficiaries a duty of loyalty and cautions fiduciaries that they must either avoid certain types of transactions or not serve as fiduciaries. Section 406 is violated if fiduciaries invest plan assets in companies in which any fiduciary owns an equity interest or from which any fiduciary receives compensation for the investment. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 8 EBC 2457 (2d Cir. 1987).
    2. [General] Based on Congressional concern about protection of plan beneficiaries, ERISA Sections 406(a)(1)(D) and (b)(1) should be read broadly as a gloss on the duty of loyalty required by Section 404 and should be read to cover action of trustee who buys shares in target corporation in order to assist either target's management or raider in its quest for corporate control or a control premium. Leigh v. Engle, 727 F.2d 113, 4 EBC 2702 (7th Cir. 1984).
    3. [Compensation] The prohibition against fiduciaries acting in conflict of interest situations is violated where trustees authorize, for each other, monthly payment from plan's assets as compensation for their services as trustees while they are receiving full-time pay from participating employers or union and further authorize plans to make contributions on their behalf so as to make each other eligible for receipts of benefits from the plans. Donovan v. Daugherty, 550 F.Supp. 390, 3 EBC 2079 (S. D. Ala. 1982).
    4. [Loans] Two trustees of a multiemployer plan who owned a large interest in a corporation and who caused the plan to make a loan commitment to the corporation so that the corporation could remove liens on an aircraft the corporation wished to acquire free of encumbrances allegedly violated Section 406(b)(1). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order). See also Marshall v. Dekeyser, 485 F.Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).

Section 406(b)(2)

A fiduciary with respect to a plan shall not -
(2) In his individual 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 its participants or beneficiaries, . . .
  1. Conference Report
  2. Page 309 of the Congressional Conference Report covers the above provision.

  3. Regulations

No regulations have been issued yet. However, the regulations under Section 408(b)(2) and two prohibited transaction class exemptions amplify this prohibition.

    1. This prohibition is imposed to deter fiduciaries from exercising the authority, control or responsibility that makes such persons fiduciaries when they have interests that may conflict with the interests of the plans for which they act. ERISA Regulation § 2550.408b-2(e)(1).
    2. A fiduciary may not use the authority, control or responsibility that makes such a person a fiduciary to cause the plan to pay an additional fee to such fiduciary (or to a person in which such person has an interest that may affect the exercise of such fiduciary's best judgment as a fiduciary). DOL ERISA Regulation 2550.408b-2(e)(1).
    3. The regulation cited above contains several important examples. DOL ERISA Regulation 2550.408b-2(f); however, not all of the examples deal with Section 406(b)(2).
    4. The preambles to PTE C 76-1 and PTE 77-10 amplify the interrelationships between this prohibition and the other prohibitions.
  1. Interpretive Bulletins
    1. If a fiduciary, in addition to his duties for the plan, serves in a decision making capacity with another party, the mere fact that such fiduciary effects payments to such party of money to which a participant is entitled at the direction of the participant and in accordance with specific plan provisions does not contravene Section 406(b)(2). IB 78-1.
  1. Advisory Opinions
    1. [Bank Stock] The investment of plan assets in a bank of which a fiduciary is a director may be a prohibited transaction under Section 406(b)(2). AO 76-62.
    2. [Bank Stock - Purchase/Retention/Sale of Fiduciary Bank/BHC Stock]
    3. General Discretionary Rule - An ERISA plan may not invest in the stock of a fiduciary bank if the bank has discretion over the transaction. The discretionary retention of such stock would also be prohibited. Non-discretionary purchases, sales, and retentions are permitted.

      DOL notes the duty of undivided loyalty owed under § 406(b), but the conflict of interest which may occur if a sale of bank stock would be in the best interests of a plan, but such a sale (or the news of such a sale) might lower the price of the bank's stock.

      See 1980 letter from DOL to OCC.

    4. [Custodians] The interests of the bank that performs the services of custodial agent for the plan and is a plan fiduciary are or could be deemed to be adverse to the interests of the plan. AO 76-76.
    5. [Deposits] Investment of the assets of a noncollectively bargained multiple employer plan covering employees of banks, in savings accounts and certificates of deposit of banks that are contributing employers, constitutes a prohibited transaction under Section 406(a) and may also be prohibited under Section 406(b)(1) and (2) because members of the administrative board of the plan, which directs plan investments, are officers and employees of contributing employer banks.
    6. However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1) and 406(b)(2) for the investment of plan assets in the deposits or certificates of deposit of a bank that is a plan fiduciary or party in interest if the requirements of ERISA Regulations Section 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the banks in which deposits may be made. The specifications may be made to the plan by amendment retroactive to November 1, 1977. AO 79-25.

    7. [Investment Manager Appointment] The involvement of a plan fiduciary in the appointment of a corporation of which such fiduciary is a director as an investment manager of the plan's assets may be a prohibited transaction under Section 406(b)(2). AO 76-15.
    8. [Investment Management] The provision of investment management services by the plan manager to a fund would be exempt from Section 406(a) if the conditions of Section 408(b)(2) are met. The question of what constitutes a necessary service, a reasonable contract or arrangement, or reasonable compensation is factual in nature and not subject to advisory opinions.
    9. Further, the mere selection of the manager to provide investment management services to a plan where the payment of compensation for such services is to be made by the plan sponsor receiving such services would not constitute a per se violation of Section 406(b)(1), but such violation could occur in the course of the committee's deliberations to invest in the fund and the concomitant retention of the plan manager. Accordingly, a ruling that the arrangement is exempt from Section 406(b)(1) cannot be made.

      Generally, a fiduciary's decision to retain an affiliate service provider whose fees will be paid by the plan sponsor will not involve an adversity of interest as contemplated by Section 406(b)(2) of the act. If, for example, a fiduciary of the plan, in negotiating a service contract on behalf of the plan, also acts on behalf of a person and causes that person to benefit from such a decision at the expense of any kind to the plan, the decision to retain the service provider would result in a violation of Section 406(b)(2). Accordingly, the decision to retain the manager to service the plan investments in the fund would not, in itself, constitute a violation of Section 406(b)(2); but because it is inherently factual in nature, no opinions can be rendered thereon. AO 83-44A.

    10. [Leases to Sponsor] The leasing by a plan of improved real estate to the employer maintaining the plan is a prohibited transaction pursuant to ERISA Section 406(a)(1)(A), (C), (D) and (E) and Code Section 4975(c)(1)(A), (C) and (D). In addition, since any property leased to an employer is employer real property as defined in ERISA Section 407(d)(2), if such property is not qualifying employer real property within the meaning of ERISA Section 407(d)(4), the holding of such property by the plan is a prohibited transaction pursuant to ERISA Sections 406(a)(2) and 407(a)(1). Also, to the extent that the employer may be a fiduciary to the plan as defined in ERISA Section 3(21)(A) and Code Section 4975(e)(3), the lease arrangement may be a prohibited transaction pursuant to ERISA Section 406(b)(1) and (2) and Code Section 4975(c)(1)(E). Proposed PTE I 192.
    11. [Sale to Insider of Sponsor] The sale of certain parcels of real property by a profit-sharing plan to the majority shareholder of the employer maintaining the plan and to a corporation 50% or more of which is owned by such majority shareholder would constitute prohibited transactions pursuant to ERISA Section 406(a)(1)(A) and (D) and Code Section 4975(c)(1)(A) and (D). In addition, if the majority shareholder has the power to appoint and remove the plan trustee, such sales may be prohibited transactions under ERISA Section 406(b)(1) and (2) and Code Section 4975(c)(1)(E). Proposed PTE I 492.
  1. Court Decisions
    1. [General] ERISA Section 406(b)(2) is to be read as requiring a transaction between the plan and a party having an adverse interest for the prohibition to apply. Donovan v. Bierwirth, 680 F.2d 263, 3 EBC 1417 (2d Cir.), cert. denied, 459 U.S. 1069 (1982).
    2. [General] ERISA Section 406(b)(2) prohibits representation of parties who are adverse in the technical sense. A transaction does not have to exhibit fiduciary misconduct, reflecting harm to the beneficiaries, before ERISA Section 406(b)(2) is violated. When identical trustees of two plans whose participants and beneficiaries are not identical effect a loan between the plans without a statutory or administrative exemption, a per se violation of ERISA exists. ERISA Section 406(b) contains a blanket prohibition of certain transactions, no matter how fair. Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979).
    3. [Loans] A party who is a borrower from a plan or who is claiming payment from a plan will, by definition, have interests adverse to the interests of the plan. Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978); Marshall v. Dekeyser, 485 F.Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
    4. [Loans] An employer trustee of a Taft-Hartley plan, who was also the director of the employer association, did not violate Section 406(b)(2) by either:
  1. advising employers not to make contributions to the plan and to resist audits by the plan, or
  2. bringing suit to block the plan's collection procedures that the trustee believed to be unauthorized.

The court noted that under Section 408(c)(3), a plan trustee can also serve as the director of an employer association and perform all of the duties required of a person holding each of these positions. The court also indicated that, where a trustee acts pursuant to Section 405(a)(3) to remedy a breach of fiduciary duty that such trustee believes to have been committed by another plan fiduciary, the trustee is not acting in violation of Section 406(b)(2) regardless of the trustee's motivation. Curren v. Freitag, 432 F.Supp. 668 (S.D.Ill. 1977). See also N.L.R.B. v. Construction and General Laborers Union Local 110, 577 F.2d 16 (8th Cir. 1978), cert. denied, 439 U.S. 1070 (1979) (union trustee and secretary-treasurer of union).

    1. [Loans] The trustees of a multiemployer plan who agreed to cause the plan to: (a) pay rent to a corporation for the joint lease of an airplane (with a union) at a time when the plan held two notes from such corporation that were in default, or (b) make a loan commitment to the corporation so that the corporation could remove liens on an airplane it wished to acquire free of encumbrances, allegedly violated Section 406(b)(2). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).

Section 406(b)(3)

A fiduciary with respect to a plan shall not -
(3) Receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.
  1. Conference Report
  2. The above section is explained on page 309 of the Congressional Conference Report.

  3. Regulations

No regulations have been issued yet. However, the regulations under Section 408(b)(2) amplify this prohibition.

    1. This prohibition is imposed to deter fiduciaries from exercising the authority, control or responsibility that makes such persons fiduciaries when they have interests that may conflict with the interests of the plans for which they act. DOL ERISA Regulation 2550.408b-2(e)(1).
    2. A fiduciary may not use the authority, control or responsibility that makes such a person a fiduciary to cause the plan to enter into a transaction involving plan assets whereby such fiduciary (or a person in which such fiduciary has an interest that may affect the exercise of such fiduciary best judgment as a fiduciary) will receive consideration from a third party in connection with such transaction. DOL ERISA Regulation 2550.408b-2(f).
    3. The regulation cited above contains several important examples. DOL ERISA Regulation 2550.408b-2(f); however, not all of the examples deal with Section 406(b)(3).
    4. For a definition of plan assets, see DOL ERISA Regulation 2510.3-101.
  1. Advisory Opinions
    1. [Compensation] The receipt of compensation by a fiduciary from a plan is a prohibited transaction if the fiduciary is already receiving full-time compensation from the employer maintaining the plan. AO 78-08.
    2. [Estate Legacy] A violation of Section 406(b)(3) would not generally occur from the mere receipt of a distribution from an estate by a plan fiduciary as beneficiary of the estate in a transaction separate and apart from the plan's acquisition of qualifying employer securities from that estate. Under such circumstances, the distribution would not appear to be in connection with the transaction involving plan assets. AO 87-04A.
    3. [Mutual Funds] No Section 406(b)(2) or (3) violations arise, per se, because fiduciaries to certain employee benefit plans are also sponsors of and advisers to certain mutual funds and the employee benefit plans purchase shares therein so long as these fiduciaries exercise none of the authority, control, or responsibility of the plans with regard to causing the plans to purchase units in the mutual funds. AO 82-31A.
  1. Court Decisions
    1. Fiduciary charged with violation of Section 406(b)(3) prohibiting receipt of consideration for fiduciary's own personal account from any party dealing with plan either must prove by a preponderance of evidence that the transaction in question fell within an exception, or must prove by clear and convincing evidence that compensation received was for services other than transactions involving plan assets. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 8 EBC 2457 (2d Cir. 1987).
    2. If charged with a violation of Section 406(b)(3) the fiduciary bears the burden of proving that the questionable transaction fell within a Section 408 or regulatory exemption to Section 406(b)(3) or that compensation was for services other than the questionable transaction. For purposes of deciding a motion for summary judgment, if the transaction at issue is not exempted from the prohibitions of Section 406, the evidence before the court must be sufficient to permit a jury to conclude, by clear and convincing evidence, that the compensation received by a fiduciary was not "in connection with" the questionable investment of plan assets. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 8 EBC 2457 (2d Cir. 1987).

Section 406(c)

A transfer of real or personal property by a party in interest to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the plan assumes or if it is subject to a mortgage or similar lien which a party-in-interest placed on the property within the 10-year ending on the date of the transfer.
  1. Conference Report

This provision is explained on page 308 of the Congressional Conference Report.

10 Percent Limitation on employer securities and employer real property

ERISA Section 407

Section 407(a)(1)

Except as otherwise provided in this section and section 414, a plan may not acquire, or hold:
(A) Any employer security which is not a qualifying employer security, or
(B) Any employer real property which is not qualifying employer real property.
  1. Conference Report
  2. Pages 316-320 of the Congressional Conference Report explains the employer security and real property provisions.

  3. Regulations
    1. Refer to DOL ERISA Regulation 2550.407a-1. A plan may hold or acquire only employer securities that are qualifying employer securities and employer real property that is qualifying employer real property. A plan may not hold employer securities and employer real property that are not qualifying employer securities and qualifying employer real property except in certain circumstances.
    2. See DOL ERISA Regulation 404c-1, covering participant-directed plans (such as 401(k) and 403(b)), which contains authorization for investments in employer securities (404c-1(b)(2)(B)(1)(vii)), and special conditions when offering them as an "investment alternative" (see 404c-1(d)(2)(ii)(E)(4)(vii), (viii) and (ix), as well as general 404c-1 requirements). In general, fiduciaries are exempted from certain ERISA fiduciary responsibility liability if plans meet certain conditions and participants direct their own investments.
    3. Also refer to IRS Regulation 54.4975-12, which defines the term "Qualifying Employer Security".
  1. Advisory Opinions
    1. [Concentrations] The only language of ERISA that specifically limits the percentage amount of a particular asset that a plan may hold is found in Section 407, and this limitation refers to the holding or acquisition of qualifying employer securities or real property. Other than Section 407, the amount or percentage of plan assets that may be placed in a particular investment vehicle is governed by the general standards of fiduciary responsibility. AO 76-74.
    2. [Limited Partnerships] Units in a limited partnership are not qualifying employer securities within the definition of ERISA Section 407(d)(5). The continued holding of such units may be a prohibited transaction under ERISA Sections 406(a)(2) and 407(a)(1). Proposed PTE I 038.
    3. [Property - Leased] The leasing by a plan of improved real property to the employer maintaining the plan is a prohibited transaction pursuant to ERISA Section 406(a)(1)(A), (C), (D) and (E) and Code Section 4975(c)(1)(A), (C) and (D). In addition, since any property leased to an employer is "employer real property" as defined in ERISA Section 407(d)(2), if such property is not "qualifying employer real property" within the meaning of ERISA Section 407(d)(4), the holding of such property by the plan is a prohibited transaction pursuant to ERISA Sections 406(a)(2) and 407(a)(1). Also, to the extent that the employer may be a fiduciary to the plan as defined in ERISA Section 3(21)(A) and Code Section 4975(e)(3), the lease arrangement may be a prohibited transaction pursuant to ERISA Section 406(b)(1) and (2) and Code Section 4975(c)(1)(E). Proposed PTE I 192.
    4. [Stock] Stock of the parent in a controlled group corporation held by an employee benefit plan sponsored and maintained by a wholly owned subsidiary constitutes employer qualified securities under Section 407. AO 84-36A.

Section 407(a)(2)

Except as otherwise provided in this section and section 414, a plan may not acquire any qualifying employer security or qualifying employer real property, if immediately after such acquisition the aggregate fair market value of employer securities and employer real property held by the plan exceeds 10% of the fair market value of the assets of the plan.
  1. Conference Report
  2. Pages 316-320 of the Congressional Conference Report explains this employer security and real property provision.

  3. Advisory Opinions
    1. [Stock Exchanges] The exchange of stock between the employer maintaining the plan and the plan pursuant to a re-incorporation of the employer in another state is not an acquisition of employer stock by the plan. AO 75-100.
    2. [Warrants] The acquisition of an employer's common stock by a plan through the exercise of warrants constitutes an acquisition by a plan of qualifying employer securities within the meaning of ERISA Section 407(a)(2). PLR 791005.

Section 407(a)(3)

Except as otherwise provided in this section and section 414:
(A) After December 31, 1984, a plan may not hold any qualifying employer securities or qualifying employer real property (or both) to the extent that the aggregate fair market value of such securities and property determined on December 31, 1984 exceeds 10% or the greater of:
  (i) The fair market value of the assets of the plan, determined on December 31, 1984, or
  (ii) The fair market value of the assets of the plan determined on January 1, 1975.
(B) Subparagraph (A) of this paragraph shall not apply to any plan that on any date after December 31, 1974, and before January 1, 1985, did not hold employer securities or employer real property (or both) the aggregate fair market value of which determined on such date exceeded 10% of the greater of -
  (i) The fair market value of the assets of the plan, determined on such date, or
  (ii) The fair market value of the assets of the plan determined on January 1, 1975.
  1. Conference Report
  2. Pages 316-320 of the Congressional Conference Report explains the employer security and real property provisions.

  3. Advisory Opinions
    1. A plan will meet the requirements of Section 407(a)(3)(B) if it falls below the 10% limitation on any day prior to December 31, 1984. AO 79-27.
  1. Court Decisions
    1. Where a trustee invests less than 10% of a pension plan's assets complying with ERISA Section 407(a)(3), a trustee is not relieved of other fiduciary duties contained in ERISA. Donovan v. Bierwirth, 680 F.2d 263, 3 EBC 1417 (2d Cir.), cert. denied, 459 U.S. 1069 (1982).

Section 407(a)(4)

Except as otherwise provided in this section and section 414:
(A) After December 31, 1979, a plan may not hold any employer securities or employer real property in excess of the amount specified in regulations under subparagraph (B). This subparagraph shall not apply to a plan after the earliest date after December 31, 1974, on which it complies with such regulations.
(B) Not later than December 31, 1976, the Secretary shall prescribe regulations which shall have the effect of requiring that a plan divest itself of 50% of the holdings of employer securities and employer real property which the plan would be required to divest before January 1, 1985, under paragraph (2) or subsection (c) (whichever is applicable).
  1. Conference Report
  2. Pages 316-320 of the Congressional Conference Report explain the employer security and real property provisions.

  3. Advisory Opinions
    1. [Bonds] A plan's holding of debentures issued by an employer may constitute a loan or extension of credit to the employer, which, if the conditions of Section 414(c)(1) are met, would be exempt until June 30, 1984 from the restrictions of Section 407(a). WSB 79-69.

Section 407(b)

(1) Subsection (a) of this section shall not apply to any acquisition or holding of qualifying employer securities or qualifying employer real property by an eligible individual account.
(2) Cross References. -
  (A) For exemption from diversification requirements for holding of qualifying employer securities and qualifying employer real property by eligible individual account plans, see section 404(a)(2).
  (B) For exemption from prohibited transactions for certain acquisitions of qualifying employer securities and qualifying employer real property which are not in violation of the 10% limitation, see section 408(e).
  (C) For transitional rules respecting securities or real property subject to binding contracts in effect on June 30, 1974, see section 414(c).
  1. Conference Report

Pages 316-320 of the Congressional Conference Report explains the above employer security and real property provision.

Section 407(c)

(1) A plan which makes the election under paragraph (3) shall be treated as satisfying the requirements of section 407(a)(3) if -- and only if -- employer securities held on any date after December 31, 1974 and before January 1, 1985 have a fair market value, determined as of December 31, 1974, not in excess of 10% of the lesser of
  (A) The fair market value of the assets of the plan determined on such date (disregarding any portion of the fair market value of employer securities which is attributable to appreciation of such securities after December 31, 1974 but not less than the fair market value of plan assets on January 1, 1975), or
  (B) An amount equal to the sum of (i) the total amount of the contributions to the plan received after December 31, 1974, and prior to such date, plus (ii) the fair market value of the assets of the plan, determined on January 1, 1975.
(2) For purposes of this subsection, in the case of an employer security held by a plan after January 1, 1975, the ownership of which is derived from ownership of employer securities held by the plan on January 1, 1975, or from the exercise of rights derived from such ownership, the value of such security held after January 1, 1975, shall be based on the value as of January 1, 1975, of the security from which ownership was derived. The Secretary shall prescribe regulations to carry out this paragraph.
(3) An election under this paragraph may not be made after December 31, 1975. Such an election shall be made in accordance with regulations prescribed by the Secretary, and shall be irrevocable. A plan may make an election under this paragraph only if on January 1, 1975, the plan holds no employer real property. After such election and before January 1, 1985, the plan may not acquire any employer real property.
  1. Conference Report

Pages 316-320 of the Congressional Conference Report explain the employer security and real property provisions.

Section 407(d)(1)

For purposes of this section -
The term "employer security" means a security issued by an employer of employees covered by the plan, or by an affiliate of such employer. A contract to which section 408(b)(5) applies shall not be treated as a security for purposes of this section.
  1. Conference Report
  2. Pages 316-320 of the Congressional Conference Report explain the definition of the term employer security.

  3. Advisory Opinions
    1. [Bonds] Rights to certain debentures may be employer securities. AO 76-72.
    2. [Loan Guarantees] The guarantee by an employer of loans made by the plan to a third party constitutes an employer, under Section 407(d)(1) but not a qualifying employer security under Sections 407(d)(5) and 407(e). WSB 79-51.
 

Section 407(d)(2)

For purposes of this section -
The term "employer real property" means real property (and related personal property) which is leased to an employer of employees covered by the plan, or to an affiliate of such employer. For purposes of determining the time at which a plan acquires employer real property, for purposes of this section, such property shall be deemed to be acquired by the plan on the date on which the plan acquires the property or the date on which the lease to the employer (or affiliate) is entered into, whichever is later.
  1. Conference Report

Pages 316-320 of the Congressional Conference Report explain the definition of the term employer real property.

Section 407(d)(3)

For purposes of this section -
(A) The term "eligible individual account plan" means an individual account plan which is (i) a profit-sharing, stock bonus, thrift or savings plan; (ii) an employee stock ownership plan; or (iii) a money purchase plan which was in existence on the date of enactment of this Act and which on such date invested primarily in qualifying employer securities. Such term excludes an individual retirement account or annuity described in section 408 of the Internal Revenue Code of 1954.
(B) Notwithstanding subparagraph (A) a plan shall be treated as an eligible individual account plan with respect to the acquisition or holding of qualifying employer real property or qualifying employer securities only if such plan explicitly provides for acquisition and holding of qualifying employer securities or qualifying employer real property (as the case may be). In the case of a plan in existence on the date of enactment of this Act, this subparagraph shall not take effect until January 1, 1976.
  1. Conference Report
  2. The term eligible individual account plan is covered at pages 316-320 of the Congressional Conference Report.

  3. Advisory Opinions
    1. [ESOPs] Section 407(b)(1) provides that the limitations on the acquisition and retention of qualifying employer securities and qualifying employer real property as contained in Section 407(a) do not apply to eligible individual account plans. Section 407(d)(3) defines the term eligible individual account plan to include an individual account plan that is an ESOP and that expressly provides for the acquisition and holding of employer securities. AO 81-67A.
    2. An individual account plan is not an eligible individual account plan unless it explicitly provides for the acquisition and holding of qualifying employer securities or qualifying employer real property. AO 78-25; WSB 79-86.
    3. [Profit Sharing Plans] Where a plan is a profit-sharing plan and, therefore, meets the requirements of Section 407(d)(3)(A), it would constitute an eligible individual account plan for purposes of Section 407(d)(3) in connection with the sale of employer stock held by the plan, even though the plan does not expressly provide for the acquisition and holding of employer securities as required by Section 407(d)(3)(B). WSB 79-88.
  1. Court Decisions
    1. [Governing Documents] For purposes of determining whether a plan provides for the purchase of employer securities, both the plan and the trust agreement can be looked to as plan documents. Leonard v. Drug Fair, Inc., Fed. Sec. L. Rep. (CCH) 997,144 (D.D.C. 1979).
    2. [Defined Contribution Plan] Where the board of directors amended a pension plan to allow up to 50% of the plan's assets to be used to purchase the employer's securities, the plan will not violate ERISA Section 407 if the plan is within the definition of an eligible individual account plan. District 65, U.A. W. v. Harper & Row Publishers, Inc., 576 F.Supp. 1468, 4 EBC 2586, F&L S&L L. Rep. (CCH) 999,608 (S.D.N.Y. 1983).
    3. [ESOPs] If a pension plan that allows up to 50% of the plan's assets to be used to purchase the employer's securities is an ESOP, the plan must conform to Code Section 401 in order to be an eligible individual account plan under ERISA Section 407(a). District 65, U.A. W. v. Harper & Row Publishers, Inc., 576 F.Supp. 1468, 4 EBC 2586, F&L S&L L. Rep. (CCH) 999,608 (S.D.N.Y. 1983).
    4. [Bonds] In order for the purchase of debt securities by an eligible individual account plan to be exempt from the Section 407 limitations, the plan must specifically provide for the holding of marketable obligations of the type involved. Marshall v. Dekeyser, 485 F.Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).

Section 407(d)(3)(C)

The term "eligible individual account plan" does not include any individual account plan the benefits of which are taken into account in determining the benefits pursuant to a participant under any defined benefit plan.

Section 407(d)(4)

For purposes of this section -
The term "qualifying employer real property" means parcels of employer real property-
(A) if a substantial number of the parcels are dispersed geographically;
(B) if each parcel of real property and the improvements thereon are suitable (or adaptable without excessive cost) for more than one use;
(C) even if all such real property, is leased to one lessee (which may be an employer, or an affiliate of an employer); and
(D) if the acquisition and retention of such property comply with the provisions of this part (other than section 404(a)(1)(B) to the extent it requires diversification, and sections 404(c)(1)(C), 406 and 407(a) of this section).
  1. Conference Report
  2. Pages 316-320 of the Congressional Conference Report explain the definition of the term qualifying employer real property.

  3. Advisory Opinions
    1. To meet the substantial number requirement of Section 407(d)(4)(A), there must be more than one parcel. AO 84-20A.
    2. A single parcel of real property cannot be qualifying employer real property. Qualifying employer real property means parcels (plural) of employer real property. AO 76-14; AO 76-132; AO 77-16; Proposed PTE I 192, PLR 7847043.
    3. Whether a substantial number of parcels of employer real property are geographically dispersed so as to provide protection for a plan in the event of adverse economic conditions in any one area, and whether such parcels are suitable or adaptable without excessive cost for more than one use are both questions that are inherently factual in nature and will not be the subject of advisory opinions. AO 84-20A.
    4. Employer real property, is qualifying employer real property where there are six parcels of real property located in four different states; no two parcels are closer than 80 miles apart; five of the six parcels contain simple one-story structures and the machinery located therein could be removed at minimal costs without affecting the structure; and the sixth parcel contains a building with offices and open space for laboratories and machinery. AO 75-11.
    5. The definition of the term qualifying employer real property requires a determination regarding whether a particular acquisition or retention of employer real property complies with ERISA Section 404. The Department of Labor will not issue an advisory opinion under Section 407(d)(4)(D) as to whether particular employer real property is qualifying employer real property. The Department will; however, issue advisory opinions regarding the other substantive conditions of Section 407(d)(4). AO 77-01.
    6. The geographical dispersion requirement is satisfied where three parcels of property contain three restaurants that serve and draw from different fast food markets. AO 77-01.

Section 407(d)(5)

For purposes of this section -
The term "qualifying employer security" means an employer security which is (1) stock; (2) a marketable obligation (as defined in section (e)), or (3) an interest in a publicly traded partnership (as defined in section 7704(b) of the IRC of 1986), but only if such partnership is an existing partnership as defined in section 10211(c)(2)(A) of the Revenue Act of 1987 (Public Law 100-203). After December 17, 1987, in the case of a plan other than an eligible individual account plan, stock shall be considered a qualifying employer security only if such stock satisfies the requirements of subsection (f)(1).
  1. Conference Report
  2. Pages 316-320 of the Congressional Conference Report explain the definition of the term qualifying employer security.

  3. Regulations
  4. DOL ERISA Regulation 2550.407d-5 merely restates the statutory provisions.

  5. Advisory Opinions
    1. [Affiliate] A plan owns 100% of the stock of a corporation, but employees of that corporation do not participate in the plan. The stock of the corporation is not qualifying employer securities under Section 407(d)(5), since it has not been issued by an employer or an affiliate of an employer. AO 79-27.
    2. [Affiliate] In general, where the employees of two or more employers [whether or not affiliated within the meaning of Section 407(d)(7)] are covered by a single plan, the securities issued by each employer or by an affiliate thereof, as defined in Section 407(d)(7), would ordinarily constitute qualifying employer securities within the meaning of Section 407(d)(5) if the applicable requirements under that section are satisfied. Accordingly, if the plan is, in fact, a single plan and continues to be maintained as one plan by both employers for their respective employees, the common stocks of each and both employers would constitute qualifying employer securities for purposes of applying the provisions of Sections 404(a)(2) and 407. AO 81-5A.
    3. [Affiliate Stock] The common stock of a wholly owned subsidiary would be a qualifying employer security because it is a stock issued by an affiliate of an employer of employees covered by the plan. If the subsidiary has such employees, it would be stock issued by an employer of employees covered by the plan. If the subsidiary has employees covered by the plan, the subsidiary's stock will continue to be a qualifying employer security after the plan owns all of such stock. WSB 78-31. See also AO 77-30; WSB 78-26; WSB 79-86.
    4. [Convertible Bonds] Debentures issued by an employer that are convertible into stock do not constitute stock for Purposes of Section 407(d)(5). AO 79-45.
    5. [Loan Guarantees] The guarantee by an employer of loans made by the plan to a third party constitutes an employer security under Section 407(d)(1) but not a qualifying employer security under Sections 407(d)(5) and 407(e). WSB 79-51.
    6. [Rights] Rights to certain debentures are not qualifying employer securities because they are neither stock nor marketable obligations. AO 76-72.
    7. [Stock] Book value shares are qualifying employer securities. AO 77-35.
    8. [Stock - Preferred] Preferred stock issued by an affiliate of an employer whose employees are covered by a plan is a qualifying employer security. AO 75-89.

Section 407(d)(6)

For purposes of this section -
The term "employee stock ownership plan" means an individual account plan -
(A) Which is a stock bonus plan which is qualified, or a stock bonus plan and money purchase plan both of which are qualified, under section 401 of the Internal Revenue Code of 1954, and which is designed to invest primarily in qualifying employer securities, and
(B) Which meets such other requirements as the Secretary of the Treasury may prescribe by regulation.
  1. Conference Report
  2. The term ESOP is covered at pages 316-320 of the Congressional Conference Report.

  3. Regulations
  4. Refer to DOL ERISA Regulation 2550.407d-6. These regulations contain several requirements relating to ESOPs.

    An ESOP must also meet such other requirements as the Secretary of the Treasury may prescribe by regulation under Section 4975(e)(7) of the Internal Revenue Code.

  5. Advisory Opinions
    1. [ESOPs] Where a plan is organized and established as an employee stock ownership plan for the purpose of investing primarily in qualifying employer securities but where under the circumstances it would not be prudent or otherwise beneficial to plan participants for the ESOP to invest a large percentage of its assets in qualifying employer securities, even though plan documents generally provide for such investments. In that situation the potential liability for breach of fiduciary duty makes a fiduciary's decision to disregard a plan provision difficult. A plan provision that requires a plan to invest more than 50% of is assets in qualifying employer securities would normally be deemed to satisfy the requirement of Section 407(d)(6) that a plan must satisfy the primary requirement with regard to its primary investment objectives and vehicle. AO 83-6A.
  1. Court Decisions
    1. [ESOPs] Where a pension plan purchased common stock without voting rights, the plan can still qualify as an ESOP under ERISA Section 407(d)(6), since Code Section 401 does not require stock to have voting rights for tax qualified plans. However, the ESOP must obtain voting power equal to or in excess of the amount of voting power held in said stock by the employer. Schoenholtz v. Doniger 657 F.Supp. 899, 8 EBC 2031 (S.D.N.Y. 1987).

Section 407(d)(7)

For purposes of this section -
A corporation is an affiliate of an employer if it is a member of any controlled group of corporations (as defined in section 1563(a) of the Internal Revenue Code of 1954, except that "applicable percentage" shall be substituted for "80%" whenever the latter percentage appears in such section) of which the employer who maintains the plan is a member. For purposes of the preceding sentence, the term "applicable percentage" means 50%, or such lower percentage as the Secretary may prescribe by regulation. A person other than a corporation shall be treated as an affiliate of an employer to the extent provided in regulations of the Secretary. An employer which is a person other than a corporation shall be treated as affiliated with another person to the extent provided by regulations of the Secretary. Regulations under this paragraph shall be prescribed only after consultation and coordination with the Secretary of the Treasury.
  1. Conference Report
  2. "Affiliate" is discussed on pages 316-320 of the Congressional Conference Report.

  3. Advisory Opinions
    1. A corporation must be an affiliate prior to the sale of its securities for its securities to be either employer securities or qualifying employer securities. AO 77-18.
    2. [Affiliate] Where an employer owns 62% of the outstanding stock of a corporation, such corporation is an "affiliate" of the employer under Section 407(d)(7). AO 79-23.
    3. [Affiliate] A plan owns 100% of the stock of a corporation, but employees of that corporation do not participate in the plan. The stock of the corporation is not qualifying employer securities under Section 407(d)(5), since it has not been issued by an employer or an affiliate of an employer. AO 79-27.
    4. For the exemption provided by Section 408(e) to apply to any sale, the property being sold must be either qualifying employer securities or qualifying employer real property at the time such securities or property, are sold by the plan. If a corporation is not a member of a controlled group prior to the consummation of a sale, the corporation's securities will not be securities of an affiliate prior to the sale. AO 77-18.

Section 407(d)(8)

For purposes of this section -
The Secretary may prescribe regulations specifying the extent to which conversions, splits, the exercise of rights, and similar transactions are not treated as acquisitions.
  1. Conference Report

The above provision is covered at pages 316-320 of the Congressional Conference Report.

Section 407(d)(9)

For purposes of this section, an arrangement which consists of a defined benefit plan and an individual account plan shall be treated as one plan if the benefits of such individual account plan are taken into account in determining the benefits payable under such defined benefit plan.

Section 407(e)

For purposes of subsection (d)(5), the term "marketable obligation" means a bond, debenture, note, or certificate, or other evidence of indebtedness (hereinafter in this subsection referred to as "obligation") if -
(1) Such obligation is acquired -
  (A) On the market, either
    (i) At the price of the obligation prevailing on a national securities exchange which is registered with the Securities and Exchange Commission, or
    (ii) If the obligation is not traded on such a national securities exchange, at a price not less favorable to the plan than the offering price for the obligation as established by current bid and asked prices quoted by persons independent of the issuer;
  (B) From an underwriter, at a price
    (i) Not in excess of the public offering price for the obligation as set forth in a prospectus or offering circular filed with the Securities and Exchange Commission, and
    (ii) At which a substantial portion of the same issue is acquired by persons independent of the issuer; or
  (C) Directly from the issuer, at a price not less favorable to the plan than the price paid currently for a substantial portion of the same issue by persons independent of the issuer;
(2)  Immediately following acquisition of such obligation -
  (A) Not more than 25% of the aggregate amount of obligations issued in such issue and outstanding at the time of acquisition is held by the plan, and
  (B) At least 50% of the aggregate amount referred to in subparagraph (A) is held by persons independent of the issuer; and
(3) Immediately following acquisition of the obligation, not more than 25% of the assets of the plan is invested in obligations of the employer or an affiliate of the employer.
  1. Conference Report
  2. These employer security provisions are discussed at pages 316-320 the Congressional Conference Report.

  3. Regulations
  4. No regulations have been issued under Section 407(e), but regulations have been issued under Section 407(d)(5). ERISA Regulation 2550.407d-5.

  5. Advisory Opinions
    1. ["Independence"] A relative of an officer of the issuer is not "independent of the issuer." WSB 77-13; AO 78-25.
    2. ["Independence"] A private foundation that was created by and may receive contributions from the issuer is not "independent of the issuer." AO 78-25.
    3. [Loan Guarantees] The guarantee by an employer of loans made by the plan to a third party constitutes an employer security under Section 407(d)(1), but not a qualifying employer security under Sections 407(d)(5) and 407(e). WSB 79-51.
    4. ["Marketable"] Debentures issued by a subsidiary of an employer constitute marketable obligations where they are purchased at the closing price on the New York Stock Exchange on the date of purchase, where they represent only 1.14% of the aggregate amount of debentures outstanding, where 50% of such aggregate amount is held by persons independent of the employer, and where the value of the debentures represents 22% of plan assets. AO 79-39.
    5. [Mergers & Acquisitions] A trust will not be considered to have acquired certain debentures if, prior to the corporate merger pursuant to which the trust would have received the debentures, the trust sells or irrevocably assigns the rights to the debentures that it would have received in the merger. AO 76-72.
    6. [Notes] A promissory note issued by an employer to a plan in lieu of a cash contribution to the plan will not constitute a marketable obligation if a substantial portion of the same issue of rates is not acquired by persons independent of the issuer for purposes of Section 407(e)(1) contemporaneously with the acquisition by the plan. PLR 7939009.

Section 407(f)

Stock satisfies the requirements of this subsection if immediately following the acquisition of such stock -
(1) (A) No more than 25% of the aggregate amount of stock of the same class issued and outstanding at the time of acquisition is held by the plan, and
  (B) At least 50% of the aggregate amount referred to in subparagraph (A) is held by persons independent of the issuer.
(2) Until January 1, 1993, a plan shall not be treated as violating subsection (A) solely by holding stock which fails to satisfy the requirements of paragraph (1) if such stock -
  (A) Has been held since December 17, 1987, or
  (B) Was acquired after December 17, 1987 pursuant to a legally binding contract in effect on December 17, 1987, and has been so held at all times after the acquisition.
(3) After December 17, 1987, no plan may acquire stock which does not satisfy the requirements of paragraph (1) unless the acquisition is made pursuant to a legally binding contract in effect on such date.


Exemptions from prohibited transactions

ERISA Section 408



Section 408(a)

Exemption Procedures

The Secretary shall establish an exemption procedure for purposes of this subsection. Pursuant to such procedure, he may grant a conditional or unconditional exemption of any fiduciary or transaction, or class of fiduciaries or transactions, from all or part of the restrictions imposed by Sections 406 and 407(a). Action under this subsection shall be taken only after consultation and coordination with the Secretary of the Treasury. An exemption granted under this section shall not relieve a fiduciary from any other applicable provision of this Act. The Secretary may not grant an exemption under this subsection unless he finds that such exemption is -
(1) Administratively feasible,
(2) In the interests of the plan and of its participants and beneficiaries, and
(3) Protective of the rights of participants and beneficiaries of such plan. Before granting an exemption under this subsection from section 406(a) or section 407(a), the Secretary shall publish notice in the Federal Register of the pendency of the exemption, shall require that adequate notice be given to interested persons, and shall afford interested persons an opportunity to present views. The Secretary may not grant an exemption under this subsection from section 406(b) unless he affords an opportunity for a hearing and makes a determination on the record with respect to the findings required by paragraphs (1), (2) and (3) of this subsection.
  1. Conference Report.
  2. The above exemption procedure is discussed on pages 309-311 of the Congressional Conference Report.

  3. Regulations.
  4. See DOL ERISA Regulation 2570.30 through .52. The regulation covers who may file for an exemption, where applications must be filed, the information to be included with an application, rights and procedures to a conference, publication and notification of interested persons, and the effect of an exemption. See also Revenue Procedure 75-26.

  5. Prohibited Transaction Class Exemptions (PTE)
    1. [Annuities] PTE C 77-8 covers the transfer of individual life insurance and annuity contracts from plans to a plan participant, the relative of a participant, the participant's employer or another plan. PTE C 77-7 covers transfers of the same assets to plans from plan participants or employers.
    2. [Brokerage Services] PTE 79-1 granted an exemption for securities transactions for employee benefit plans by broker-dealers who serve as fiduciaries to the plans.
    3. [Brokerage Services] In PTE 78-10, an exemption was granted for provision of securities by broker-dealers to plans for which they are fiduciaries.
    4. [Brokerage Services] Exemption is granted for the execution of certain securities transactions in PTE  86-128.
    5. [Collective Investment Funds] An exemption was granted for transactions between bank collective investment funds and parties in interest. PTE 80-51 (restated to PTE 91-38).
    6. [Court-Authorized Transactions] PTE C 79-15 covers certain transactions authorized or required by judicial order or judicially approved settlement decree.
    7. [Court-Directed Transactions] An exemption was granted for transactions authorized or permitted by a court. PTE 79-15.
    8. [Customer Notes] A class exemption is granted for the purchase of customer notes of a party-in-interest employer by an employee benefit plan in PTE 85-68.
    9. [Debt Retirement] PTE 80-83 provided an exemption for employee plans' purchase of securities used to retire indebtedness owed to parties in interest.
    10. [Interest-Free Loans] PTE 80-26 granted an exemption for certain interest free loans, such as overdrafts, between employee benefit plans and parties in interest.
    11. [Mortgages] An exemption was granted for employee benefit plans to provide mortgage financing to purchasers of certain residential construction in PTE 82-87.
    12. [Mortgage Pools] PTE 81-7 exempted certain transactions between employee benefit plans and parties in interest involving mortgage pool investment trusts.
    13. [Mutual Funds] PTE  77-4 covers the purchase and sale by a plan of mutual fund shares when a fiduciary to the plan is also the investment adviser for the mutual fund. Also see 1994 DOL letter to OCC.
    14. [Mutual Funds - Closed-End] In PTE 79-13, an exemption was granted for acquisitions of shares in closed-end investment companies by employee benefit plans.
    15. [Mutual Funds - Own] PTE  77-3 covers the purchase and sale of in-house mutual fund shares by an employee benefit plan covering employees of the mutual fund, its investment adviser or principal underwriter, or an affiliate thereof.
    16. [Mutual Funds - Own Closed-End] PTE 79-13 covers the acquisition and sale of shares of certain registered closed end investment companies by plans that cover employees of the company, its investment adviser or an affiliate thereof.
    17. [Office Space] PTE 77-10 grants an exemption for sharing and leasing of office space and administrative goods by multiple employer plans.
    18. [Overdrafts] PTE 80-26 granted an exemption for certain interest free loans, such as overdrafts, between employee benefit plans and parties in interest.
    19. [QPAM] PTE 84-14 covers certain prohibited transactions involving plans whose assets are managed by a qualified professional asset manager (QPAM).
    20. [Repurchase Agreements] PTE 81-8 deals with the exemption granted for certain short-term investments (including repurchase agreements) by employee benefit plans.
    21. [Securities Lending] PTE 81-6 granted an exemption for the lending of securities by employee benefit plans to broker-dealers and banks that are parties in interest to the plan.
    22. [Securities Lending - Fees] An exemption was granted for the provision of securities lending services by a fiduciary to an employee benefit plan in PTE 82-63.
    23. [Short-Term Investments] PTE 81-8 deals with the exemption granted for certain short-term investments (including repurchase agreements) by employee benefit plans.
    24. PTE  77-9 covers six classes of transactions involving insurance agents and brokers, pension consultants, insurance companies, investment companies, investment company principal underwriters, and employee benefit plans:
  • The fourth class covers the purchase with plan assets of an insurance or annuity contract from an insurance company.
  • The fifth and sixth classes of transactions cover the purchase with plan assets of insurance or annuity contracts or securities issued by an investment company in situations where the insurance company, investment company, or investment company principal underwriter is a fiduciary or service provider to the plan solely by reason of sponsorship of a master or prototype plan.
    1. Exemptions from prohibitions respecting certain transactions in which multiemployer and multiple employer plans are involved. PTE 76-1 and PTE 77-10. These exemptions cover three classes of transactions: (1) delinquent employer contributions; (2) construction loans; and (3) office space, administrative services and goods.
    2. Exemptions from prohibitions respecting certain classes of transactions involving employee benefit plans and certain broker-dealers, reporting dealers and banks. PTE  75-1, PTE 78-10, and PTE 79-1. These exemptions cover five classes of transactions: (1) agency transactions and services, (2) principal transactions, (3) under writings, (4) market making, and (5) extensions of credit.
  1. Advisory Opinions
    1. [Bonding of Fiduciaries] The bonding provisions of ERISA are contained in Section 412. It is unlawful under Section 412(c) for any Person to procure a required bond through an agent in whose business operation a party in interest has any control or significant financial interest. ERISA's exemption provisions regarding bonding are contained in Section 412(e). Accordingly, it is concluded that Sections 408 and 414(c)(4) are not applicable to transactions that are unlawful under Section 412(c). AO 76-92.
    2. [Relatives] An agent or broker who is a cousin of a plan fiduciary may receive commissions as agent or broker on the sale of insurance to the plan. WSB 79-104.
  1. Court Decisions
    1. Even though the terms of a transaction may be fair to the plan, if it constitutes a prohibited transaction under Section 406, the transaction constitutes a per se violation of ERISA without a Section 408 exemption. Approval of the transaction by a Taft-Hartley umpire is not sufficient. Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979).

Section 408(b)(1)

Loans to Plan Participants

The prohibitions provided in Section 406 shall not apply to any of the following transactions:
Any loans made by the plan to parties in interest who are participants or beneficiaries of the plan if such loans:
(A) Are available to all such participants and beneficiaries on a reasonably equivalent basis,
(B) Are not made available to highly compensated employees (within the meaning of Section 414(q) of Title 26) in an amount greater than the amount made available to other employees,
(C) Are made in accordance with specific provisions regarding such loans set forth in the plan,
(D) Bear a reasonable rate of interest, and
(E) Are adequately secured.
  1. Conference Report
  2. Participant loans are discussed on pages 311-316 of the Congressional Conference Report.

  3. Statutes
  4. Also refer to Section 72(p) of the Internal Revenue Code, which imposes additional restrictions on loans to plan participants.

  5. Regulations
    1. Refer to DOL ERISA Regulation 2550.408b-1.
    2. If plan makes more than 25 participant loans in a calendar year, it will be need to make the APR and Finance Charge (and other) disclosures required by the Truth in Lending Act and Federal Reserve Regulation Z. Refer to:
    1. Footnote 3 of Regulation Z, concerning who meets the test of being a Creditor under Section 226.2(a)(17) of the Regulation; and
    2. The Federal Reserve Board Official Staff Commentary on Regulation Z explanation of how Creditor applies to -
  • Individual trust accounts instead of the Trust Department as a whole [Item 7], and
  • "Employee savings plans" (401(k) and 403(b)-type plans) [Item 8].
  1. Advisory Opinions
    1. A transaction exempted by Section 408(b) from the prohibitions of Section 406(a) is not exempted for that portion of the transaction which may constitute a violation of Section 406(b). AO 83-45A.
    2. The analysis of a program of investment by an employee benefit plan in residential mortgage loans that may be available to the plan's participants involves consideration of three distinct questions:
  1. Whether the program is prudent within the meaning of Section 404(a)(1)(B),
  2. Whether the loans within such a program are prudent within the meaning of that section, and
  3. Where a loan is to be made to a plan participant, whether the rate of interest charged on the loan is available within the meaning of Section 408(b)(1).

[Note that the Department of Labor in December 1987 issued regulations under Section 408(b)(1) defining "reasonable rate of interest" consistent with prior decisions under Section 404(a)(2)(B), for example, endorsing the market or prevailing rate of interest.] AO 81-12A.

    1. [ESOPs] Section 408(d) makes Section 408(b)(1) unavailable for transactions that involve a loan of any part of the income or corpus of a plan to a shareholder-employee as defined in Code Section 1379(d) of the employer maintaining the plan. The applicability of Section 408(b)(1) depends, among other things, on whether the proposed recipient is such a shareholder-employee. The trustees of the plan are responsible for determining whether the provisions of Section 408(b)(1), or any other section of ERISA, are applicable to the plan. AO 75-105.
    2. A transaction that constituted a prohibited transaction but that was subject to a statutory exemption under Section 408(b) when the transaction was entered into may, in the future, become prohibited while the transaction continues because of changes in the relationship, causing the loss of the statutory exemption protection for the transaction. Thus, a loan between a plan and a party in interest may be entitled to relief under Section 408(b)(1) when the loan was made. However, if the party in interest later becomes an owner-employee for purposes of Section 408(d), then the loan is a prohibited transaction for which no relief is available under Section 408(b)(1). AO 84-44A.
  1. Court Decisions
    1. If other participants are required to provide greater security for their loans from a plan than the participant was required to provide, the loans to the participant are not made on a reasonably equivalent basis to loans to other participants as required by ERISA Section 408(b)(1)(A). Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
    2. If a loan from a plan to a participant exceeds the total of all loans to all other participants, the loan does not meet the criteria of ERISA Section 408(b)(1)(B). Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
    3. A loan in an amount that exceeds the limits set forth in the plan document does not satisfy ERISA Section 408(b)(1)(C). Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
    4. A participant's vested interest in a plan may not constitute adequate security for a loan from the plan under Section 408(b)(1)(E). Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
 

Section 408(b)(2)

Ancillary Services

The prohibitions provided in Section 406 shall not apply to any of the following transactions:
Contracting or making reasonable arrangements with a party in interest for office space, or legal, accounting or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefore.
  1. Conference Report
  2. General ancillary services are covered on pages 311-316 of the Congressional Conference Report.

  3. Regulations

Refer to DOL ERISA Regulation 2550.408b-2.

    1. Section 408(b)(2) does not contain an exemption from acts described in Section 406(b)(1) through (3). Such acts are separate transactions not described in Section 408(b)(2). DOL ERISA Regulation 2550.408b-2(a).
    2. A service is necessary for the establishment or operation of a plan if the service is appropriate and helpful to the plan obtaining the service in carrying out the purposes for which the plan is established and maintained. DOL ERISA Regulation 2550.408b-2(b).
    3. No contract or arrangement is reasonable if it does not permit termination by the plan without penalty to the plan on reasonably short notice under the circumstances to prevent the plan from becoming locked into an arrangement that has become disadvantageous. DOL ERISA Regulation 2550.408b-2(c).
    4. The prohibitions of Section 406(b) supplement the other provisions of Section 406(a) by imposing on parties in interest who are fiduciaries a duty of undivided loyalty to the plans for which they act. The prohibitions are imposed upon fiduciaries to deter them from exercising the authority, control or responsibility that makes such persons fiduciaries when they have interests that may conflict with the interest of the plans for which they act. A fiduciary may not use the authority, control or responsibility that makes such person a fiduciary to cause a plan to pay an additional fee to a person in which such fiduciary has an interest that may affect the exercise of such fiduciary's best judgment as a fiduciary to provide a service. DOL ERISA Regulation 2550.408b-2(e).
    5. The regulations cited above contain several important examples. DOL ERISA Regulation 2550.408b-2(f). Some of the examples, however, only deal with Section 406(b)(1) and not with Sections 406(b)(2) and 406(b)(3).
    6. The provision of services by a multiemployer plan to a party in interest is the subject of PTE C 76-1 and PTE C 77-10.
  1. Prohibited Transaction Class Exemptions (PTE)
    1. [Bank - Securities Lending] A securities lending service offered by a bank fiduciary to plans would not be exempt under Section 408(b)(2) because the compensation arrangement, which was based on a percentage of the value of the securities loan, might involve self-dealing. AO 79-11. However, see PTE 81-6 and PTE 82-63.
    2. [Brokerage Services] A broker-dealer who provides investment advice to a plan and is therefore a fiduciary may, under certain circumstances, be able to effect brokerage transactions to a plan provided that he obtains prior authorization from another plan fiduciary before effecting any such transaction. Final PTE C 78-10.
    3. [Brokerage Services at Cost or Free] Broker-dealers may perform brokerage services for plans that they sponsor when such services are undertaken to recapture commissions, when such services are provided in accordance with the provisions of Section 408(b)(2), or when such services are performed at no charge to a plan. Final PTE C 79-1.
    4. [Indirect Expenses] Under ERISA Section 408(b)(2) and Code Section 4975(d)(2), a fiduciary may perform services for a plan and be reimbursed for certain direct expenses incurred in connection with those services. However, the allocation of overhead costs to the plan may not be covered by this exemption. Final PTE C 79-1.
    5. [Office Space] The furnishing of office space or administrative services to a plan by a participating employee organization, employer or employee association, or by another multiemployer plan or multiple employer plan that is a party in interest or disqualified person to the plan, will generally be exempt from the prohibited transaction provisions if the conditions of ERISA Section 408(b)(2) and Code Section 4975(d)(2) are met. Final PTE C 76-1.
  1. Advisory Opinions
    1. [General] The Department will not rule on what constitutes a "necessary" service, a "reasonable" contract or arrangement, or what constitutes "reasonable" compensation since each issue is inherently factual in nature. Further, although Section 408(b)(2) generally permits the performance of multiple services for the same plan, it does not exempt an act of self-dealing by a fiduciary under the provisions of Section 406(b)(1). AO 82-26A.
    2. [Administrative Services] A law firm may provide both legal and administrative services to a plan if the arrangement for all such services meets all of the requirements of Section 408(b)(2) and (c)(2) and Regulations Sections 2550.408b-2 and 2550.408c-2 and does not contravene the requirements of Section 406(b). WSB 78-18.
    3. [Administrative Services] A welfare plan may retain a participating union to provide administrative services to the plan for a fee if those plan trustees who are officers of the union physically absent themselves from all consideration of the matter and do not use any of their authority or control to influence the plan's decision to hire the union). See Example 7 of DOL ERISA Regulation 2550.408b-2(f). WSB 79-41.
    4. [Bank - Own-Bank Trustee] A bank is not prohibited from serving as trustee for a plan maintained for the bank's employees where it receives no compensation from the plan for its trustee services (Emphasis added). AO 79-49.
    5. [Bank - Brokerage Service] The provision of brokerage services by a bank to employee benefit plans maintained by it for which the bank also serves as custodian and/or investment manager would be exempt from the prohibitions of Section 406(a) if the conditions of Section 408(b)(2) are met. Whether the conditions are met in each case involves questions that are inherently factual in nature and on which the Department of Labor will issue no rulings. AO 85-15; accord AO 85-16.
    6. [Bank - CIF Investment Manager] The provision of investment management services by a wholly owned bank subsidiary would be exempt from the prohibitions of Section 406(a)(1) of ERISA in connection with the maintenance of a common or collective trust fund if the conditions of Section 408(b)(2) are specifically met. AO 82-22A.
    7. [Bank - CIF Investment Manager] The supplying of investment management and advisory services by a registered advisor/investment manager to a common trust fund of a bank, both of which are part of a single controlled group, would be exempt from the prohibitions of Section 406(a) if the conditions of Section 408(b)(2) are met. The exemption granted by Section 408(b)(2) is limited to Section 406(a) prohibited transactions and does not cover the situations described in Section 406(b). Thus, a decision with regard to the manager's retention by the common trust fiduciaries could constitute a violation of Section 406(b). Further, compensation paid by a service provider to its employees may be a properly reimbursable expense under Regulations Section 2550.408c-2(b)(3) if the expense would not, in fact, have been sustained had the services not been provided and if it can be properly allocated to the particular services provided. What constitutes a direct expense in a particular case; however, is a factual matter to be resolved, taking into account the relevant facts and circumstances, and will not be the subject of an advisory opinion. AO 83-20A.
    8. [Bank - CIF/STIF] The provision of trustee services by a bank to employee benefit plans and the investment of plan funds in the bank's commingled short term investment fund would be exempt from the prohibitions of Section 406(a) if the conditions of Sections 408(b)(2) and 408(b)(8) are met. Also, the mere selection of the bank to provide trustee services to the plans would not in itself constitute a violation of Section 406(b)(1). However, self-dealing in violation of Section 406(b)(1) could occur in the case of a committee's deliberations regarding the retention of the bank as trustee, and no opinion can be rendered on that potential circumstance. AO 82-62A.
    9. [Bank - Loan Participations] Under Section 408(b)(2), a bank trustee for a plan may also provide services to a plan under a loan participation agreement, even if the plan can terminate such services only by selling its participation. WSB 79-48.
    10. [Brokerage/Investment Management at No Cost] A brokerage firm which proposes to provide investment management and brokerage services to employee benefit plans, to be paid for directly by the plan sponsor, would be exempt from the prohibitions of Section 406(a)(1) if the conditions contained in Section 408(b)(2) are met (Emphasis added). AO 82-26A.
    11. [Custodian] Under the facts of the request, where a brokerage firm acts as custodian of custodial accounts established under a prototype plan for self-employed persons (a Keogh plan) or a simplified employee pension plan (SEP) but possesses no discretionary authority over the investments over the accounts nor any other aspect of the business administration of the custodial accounts, the firm would not be treated as a trustee for purposes of PTE 79-4. AO 82-12A.
    12. [Direct Expenses] Where the employer plan sponsor provides administrative services to the plan for charges based upon its actual cost for labor and material in connection therewith, the provision of administrative services would be exempt from the prohibitions of Section 406(a), assuming that, in fact and in operation, the plan service provider has met the conditions of Section 408(b)(2). In addition, it is the Department's view that compensation paid to a service provider to its employees may be a properly reimbursable expense under DOL ERISA Regulation 2550.408c-2(b)(3) if the expense would not have been sustained had the services not been provided, if it can be properly allocated to the particular services provided and the expense does not represent an allocable portion of overhead cost. AO 82-01A.
    13. [Float] The ancillary services exemptions (including 408(b)(6)) do not include the float earned by the fiduciary bank from a demand deposit account to the extent that it is reasonably possible to earn a return on such funds. Retention of float would be permissible if it was a part of the bank's overall compensation from the plan and if the bank had made appropriate disclosures regarding the use of float. Failure to comply would result in a violation of ERISA Section 406(b)(1). AO 93-24A.
    14. [Related Expenses] A plan may reimburse its attorney for expenses incurred in attending an educational seminar if, under the facts and circumstances, attendance at such seminar was deemed to be relevant to the needs of the plan. WSB 79-85.
    15. The provision of services, including construction or repair services, to an apprenticeship plan by a contributing employer or the leasing of office space by an apprenticeship plan from a contributing employer are covered by the statutory exemption under ERISA Section 408(b)(2). Proposed PTE C 78-5. AO 79-72.
  1. Court Decisions
    1. [Written Contract Required] The Section 408(b)(2) exemption is only available where there is a contract or arrangement for services. Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
    2. [Partial Exemption Only] ERISA Section 408(b)(2) provides no exemption from the provisions of ERISA Section 406(b). Although the language of ERISA Section 408(b)(2) appears to provide an exemption from all of the prohibitions of Section 406, the court concluded, based on the legislative history of Section 408(b)(2), that it should not be construed to provide an exemption from the prohibitions of ERISA Section 406(b). The decision explicitly supports ERISA Regulations Section 2550.408b-2(a) and (e). Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
    3. [Reasonable Compensation] Transactions between trustees of a pension, health and welfare fund and a claims processing company for the rendering of services necessary for the operation of the plan are exempted under Section 408 unless the company receives more than reasonable compensation. Brock v. Robbins 830 F.2d 64, 8 EBC 2489 (7th Cir. 1987).

Section 408(b)(3)

Loans to ESOPs

The prohibitions provided in Section 406 shall not apply to any of the following transactions:
A loan to an employee stock ownership plan (as defined in section 407(d)(6)), if -
(A) Such loan is primarily for the benefit of participants and beneficiaries of the plan, and
(B) Such loan is at an interest rate which is not in excess of a reasonable rate.
If the plan gives collateral to a party in interest for such loan, such collateral may consist only of qualifying employer securities (as defined in Section 407(d)(5)).
  1. Conference Report
  2. ESOP loans are covered in pages 311-316 of the Congressional Conference Report.

  3. Regulations

Regulations have been issued under Section 408(b)(3). See DOL ERISA Regulation 2550.408b-3.

    1. Section 408(b)(3) provides an exemption from the prohibited transaction provisions of Sections 406(a), 406(b)(1), and 406(b)(2). Section 408(b)(3) does not provide an exemption from the prohibitions of Section 406(b)(3). DOL ERISA Regulation 2550.408b-3(b)(1).
    2. The exemption under Section 408(b)(3) includes within its scope certain transactions in which the potential for self-dealing by fiduciaries exists and in which the interests of fiduciaries may conflict with the interests of beneficiaries. To guard against these potential abuses, the Department of Labor will subject these transactions to special scrutiny to ensure that they are primarily for the benefit of participants and beneficiaries. DOL ERISA Regulation 2550.408b-3(b)(2).
    3. These regulations contain several requirements relating to these loans. See also Treasury Department Regulation 54.4975-7(b).

Section 408(b)(4)

Deposits With Fiduciary Banks and Thrifts

The prohibitions provided in Section 406 shall not apply to any of the following transactions:

The investment of all or part of a plan's assets in deposits which bear a reasonable interest rate in a bank or similar financial institution supervised by the United States or a State, if such bank or other institution is a fiduciary of such plan and if -
(A) The plan covers only employees of such bank or other institution, and employees of affiliates of such bank or other institution, or
(B) Such investment is expressly authorized by a provision of the plan or by a fiduciary (other than such bank or such institution or affiliate thereof) who is expressly empowered by the plan to so instruct the trustees with respect to such investment.
  1. Conference Report
  2. Deposits with fiduciaries are discussed on pages 311-316 of the Congressional Conference Report.

  3. Regulations

Refer to DOL ERISA Regulation 2550.408b-4.

    1. Section 408(b)(4) provides an exemption from Section 406(b)(1) and 406(b)(2), as well as Section 406(a)(1) because Section 408(b)(4) contemplates a bank or similar financial institution causing a plan for which it acts as a fiduciary to invest plan assets in its own deposits or certificates of deposit, if the requirements of Section 408(b)(4) are met. However, it does not provide an exemption from Section 406(b)(3). The receipt of such consideration is a separate transaction not described in the statutory exemption. DOL ERISA Regulation 2550.408b-4(a).
    2. Such investment may be made if the investment is expressly authorized by a provision of the plan or trust agreement or if the investment is expressly authorized (or made) by a fiduciary of the plan who has authority to make such investments and who has no interest in the transaction that may affect the exercise of such authorizing fiduciary's best judgment as a fiduciary so as to cause such authorization to constitute an act described in Section 406(b). DOL ERISA Regulation 2550.408b-4.
    3. If the requirements of Section 408(b)(4) are met, a defined benefit plan maintained by a bank employer may invest in certificates of deposit issued by the bank in excess of the 10% limitation of Section 407(a) of ERISA. AO 79-76.
  1. Advisory Opinions
    1. [Banks] The investment of plan assets of a noncollectively bargained multiple employer plan covering employees of banks, in savings accounts and certificates of deposit of banks that are contributing employers, constitutes a prohibited transaction under Section 406(a) and may also be prohibited under Section 406(b)(1) and (2) because members of the administrative board of the plan, which directs plan investments, are officers and employees of contributing employer/banks.
    2. However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1) and 406(b)(2) for the investment of plan assets in the deposits or certificates of deposit of a bank that is a plan fiduciary or party in interest, if the requirements of DOL ERISA Regulation 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the bank(s) in which deposits may be made. The specifications may be made in the plan by amendment retroactive to November 1, 1977. AO 79-25.

    3. [Naming of Depository] A prototype plan used by a bank contained authorization "to invest in any type of deposit of the Trustee." The prototype plan defined the Trustee as the person who executed an adoption agreement. The bank adopted the prototype by executing an adoption agreement. A question arose as to whether such an indirect designation of the fiduciary bank was satisfactory.
    4. In response to an FDIC telephone inquiry, the DOL Office of (ERISA) Regulations and Interpretations staff indicated informally that the arrangement was deemed to comply with Section 408(b)(4) of the Act, DOL ERISA Regulation 2550.408b-4, and AO 79-25. The DOL staff indicated DOL would take a rather liberal view of the various documentation that would constitute the plan document(s). [10-27-94.]

    5. [Substantial Penalty] The payment by an employee benefit plan to an issuer bank of a penalty upon the early redemption of certificates of deposit is subject to the exemption set forth in Section 408(b)(4) to the extent the exemption was available to the certificates of deposit. AO 81-42A.
    6. [Non-bank Bank] A company engaged in the business of issuing face amount certificates for sale to employee benefit plans, among others, is a bank or similar financial institution within the meaning of Section 408(b)(4) based upon the facts set forth in the ruling request. AO 83-18A.
    7. [Non-bank Bank] An industrial loan company may qualify as a bank or similar financial institution for purposes of meeting the conditions of Section 408(b)(4), exempting transactions from the prohibitions of Section 406. Thus, investment of assets of employee benefit plans in the industrial loan entity's saving instruments would be permitted under Section 408(b)(4). AO 82-64A.
    8. [Deposits - Insured/Uninsured] The diversification requirement of Section 404(a)(1)(C) generally will not be violated if all plan assets in an individual account plan are invested in a federally insured savings account, so long as the account is fully insured. Where the account balance exceeds the amount covered by federal insurance, compliance with Section 404(a)(1)(C) is determined by whether the bank invests its assets in a diversified manner. AO 77-46.

Section 408(b)(5)

Insurance Company Fiduciaries

The prohibitions provided in Section 406 shall not apply to any of the following transactions:

Any contract for life insurance, health insurance, or annuities with one or more insurers which are qualified to do business in a State, if the plan pays no more than adequate consideration, and if each such insurer or insurers is -

(A) The employer maintaining the plan, or
(B) A party in interest which is wholly owned (directly or indirectly) by the employer maintaining the plan, or by any person which is a party in interest with respect to the plan, but only if the total premiums and annuity considerations written by such insurers for life insurance, health insurance or annuities for all plans (and their employers) with respect to which such insurers are parties in interest (not including premiums or annuity considerations written by the employer maintaining the plan) do not exceed 5% of the total premiums and annuity considerations written for all lines of insurance in that year by such insurers (not including premiums or annuity considerations written by the employer maintaining the plan).
  1. Conference Report
  2. The Congressional Conference Report explains this statutory exemption at pages 311-316.

  3. Advisory Opinions
    1. [Pooled Fund Use] Where the assets of an insurance company's own plan are maintained in a single customer separate account pursuant to a group annuity contract, the transfer of such assets in kind to a pooled separate account maintained by the company in return for the acquisition of units in such pooled account by the plan, together with a change in the contract to permit plan investment in the pooled account, is exempt under Section 408(b)(5). AO 79-79.
    2. Stop-loss policies of insurance are deemed to be included in the term "life insurance, health insurance and annuity contracts" as that term is used in PTE C 79-41 in connection with sale of stop-loss insurance by an affiliate of a bank holding company to plan sponsor by the holding company for its employees or employees of its affiliates. AO 83-19A.

Section 408(b)(6)

Ancillary Services by Depository Fiduciaries

The prohibitions provided in section 406 shall not apply to any of the following transactions:
the providing of any ancillary service by a bank or similar financial institution supervised by the United States or a State, if such bank or other institution is a fiduciary of such plan, and if:
(A) Such bank or similar financial institution has adopted adequate internal safeguards which assure that the providing of such ancillary service is consistent with sound banking and financial practice, as determined by Federal or State supervisory authority, and
(B) The extent to which such ancillary service is provided is subject to specific guidelines issued by such bank or similar financial institution (as determined by the Secretary after consultation with Federal and State supervisory authority), and adherence to such guidelines would reasonably preclude such bank or similar financial institution from providing such ancillary service -
  (i) In an excessive or unreasonable manner, and
  (ii) In a manner that would be inconsistent with the best interests of participants and beneficiaries of employee benefit plans.
Such ancillary services shall not be provided at more than reasonable compensation.
  1. Conference Report
  2. Bank ancillary services are discussed on pages 311-316 of the Congressional Conference Report.

  3. Regulations

Regulations have been issued under Section 408(b)(6). DOL ERISA Regulation 2550.408b-6.

    1. The Section 408(b)(6) exemption exempts ancillary services that do not meet the requirements of Section 408(b)(2) because the provision of such services involves self-dealing described in Section 406(b)(1) by the fiduciary bank or similar financial institution or a conflict of interest described in Section 406(b)(2). Section 408(b)(6) provides an exemption from Sections 406(b)(1) and (2) because Section 408(b)(6) contemplates the provision of such ancillary services without the approval of a second fiduciary. DOL ERISA Regulation 2550.408b-6(a).
    2. Plan assets held by a fiduciary bank that are reasonably expected to be needed to satisfy current plan expenses may be placed by the bank in a non-interest bearing checking account in the bank if the conditions of this regulation are met notwithstanding the provisions of Section 408(b)(4), which required the payment of a reasonable rate of interest on bank deposits. DOL ERISA Regulation 2550-408b-4(a).
    3. Section 408(b)(6) does not provide an exemption for the receipt of compensation described in Section 406(b)(3). The receipt of such consideration is a separate transaction not described in Section 408(b)(6). DOL ERISA Regulation 2550.408b-4(a).
  1. Prohibited Transaction Class Exemptions (PTE)
    1. [Securities Lending] Securities lending is an authorized ancillary service which may be offered by a bank to an ERISA plan. PTE 81-6 permits securities lending and PTE 82-63 permits the bank to receive a fee for providing such services.
  1. Advisory Opinions
    1. [Bank Loan to Plan] Section 408(b)(6) does not provide an exemption for a loan to a plan by a bank trustee, even if authorized by the plan instruments, in order to aid the plan in paying the purchase price for an asset being purchased by the plan at the direction of the plan's administrative committee. AO 79-73.

Section 408(b)(7)

Conversion of Securities

The prohibitions provided in section 406 shall not apply to any of the following transactions:
The exercise of a privilege to convert securities, to the extent provided in regulations of the Secretary, but only if the plan receives no less than adequate consideration pursuant to such conversion.
  1. Conference Report

The Congressional Conference Report explains this statutory exemption at pages 311-316.

Section 408(b)(8)

Collective Investment Funds

The prohibitions provided in Section 406 shall not apply to any of the following transactions:

Any transaction between a plan and -

(i) A common or collective trust fund or pooled investment fund maintained by a party in interest which is a bank or trust company supervised by a State or Federal agency or
(ii) A pooled investment fund of an insurance company qualified to do business in a State, if:
  (A) The transaction is a sale or purchase of an interest in the fund;
  (B) The bank, trust company, or insurance company receives not more than reasonable compensation; and
  (C) Such transaction is expressly permitted by the instrument under which the plan is maintained, or by a fiduciary (other than the bank, trust company, or insurance company, or an affiliate thereof) who has authority to manage and control the assets of the plan.
  1. Conference Report
  2. The use of a fiduciary's collective investment funds is covered in pages 311-316 of the Congressional Conference Report.

  3. Advisory Opinions
    1. [Annual Reports to Plan Administrators] CIFs are required to provide an annual report, covering certain material, to plan administrators of participating ERISA plans. See DOL ERISA Regulation 2520.103-5.
    2. [CIF Investments in Another CIF] Fund-to-fund investments by affiliates of a multibank holding company, by bank pooled funds in corresponding pooled funds of other affiliates of the holding company, and fund-to-fund investments by a pooled fund of the controlled group in another pooled fund of the controlled group are transactions involving the sale or purchase of all interest in a fund by an employee benefit plan and would be exempt from the prohibitions of Section 406(a)(1) if the conditions of Section 408(b)(8) are met. AO 82-41A.
    3. [Trust Company CIFs] A wholly owned subsidiary corporation of an investment manager established as a trust company and subject to the supervision and examination by the superintendent of banks in the state of its domicile shall be deemed to constitute a bank for purposes of PTE C 80-51, and its common or collective trust fund may be utilized for investment by employee benefit plans managed by the parent-investment manager so long as the conditions of Section 408(b)(8) are satisfied. AO 83-12.

Section 408(b)(9)

Distributions of Plan Assets

The prohibitions provided in section 406 shall not apply to any of the following transactions:

The making by a fiduciary of a distribution of the assets of the plan in accordance with the terms of the plan if such assets are distributed in the same manner as provided under section 4044 of this Act (relating to allocation of assets).

  1. Conference Report

The Congressional Conference Report explains this statutory exemption at pages 311-316.

Section 408(b)(10) and (11)

The prohibitions provided in section 406 shall not apply to any of the following transactions:
(10) Any transaction required or permitted under part 1 of subtitle E of title IV.
(11) A merger of multiemployer plans, or the transfer of assets or liabilities between multiemployer plans, determined by the Pension Benefit Guaranty Corporation to meet the requirements of section 4231.

Section 408(c)(1)

Nothing in section 406 shall be construed to prohibit any fiduciary from receiving any benefit to which he may be entitled as a participant or a beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries.
  1. Conference Report
  2. The Congressional Conference Report does not explain Section 408(c)(1).

  3. Court Decisions
    1. Profit-sharing plan trustees improperly refused to pay benefits to a former executive on the ground that it would breach his fiduciary duties to receive plan benefits, as he was still a plan trustee when the request was made, since Section 408(c) permits a fiduciary to receive benefits to which he may be entitled as a plan participant so long as benefits are computed and paid in the same manner as they are for other participants. Kann v. Keystone Resources, Inc. Profit Sharing Plan, 575 F.Supp. 1084, 5 EBC 1233 (W.D. Pa. 1983).
    2. Where, as a result of termination of employment, an employee is vested in only a portion of his account balance under a profit-sharing plan, the remaining portion being reallocated under the terms of the plan to other accounts of other participants, the fact that participants who are also plan fiduciaries benefited from such reallocation does not constitute self-dealing by virtue of ERISA Section 408(c)(1). Shaw v. Kruidenier, 470 F.Supp. 1375 (S.D.Iowa 1979), aff'd, 620 F.2d 207 (8th Cir. 1980).

Section 408(c)(2)

Fiduciary Fees and Expenses

Nothing in section 406 shall be construed to prohibit any fiduciary from receiving any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of his duties with the plan; except that no person so serving who already receives full-time pay from an employer or an association of employers, whose employees are participants in the plan, or from an employee organization whose members are participants in such plan shall receive compensation from such plan, except for reimbursement of expenses properly and actually incurred.

  1. Conference Report
  2. The Congressional Conference Report does not explain this interpretation.

  3. Regulations

Regulations have been issued under Section 408(c)(2). DOL ERISA Regulation 2550.408c-2.

    1. Section 408(b)(2) refers to the payment of reasonable compensation by a plan to a party in interest for services rendered to the plan. Section 408(c)(2) clarifies what constitutes reasonable compensation for such services. DOL ERISA Regulation 2550.408c-2(a).
    2. Generally, whether compensation is reasonable under Sections 408(b)(2) and 408(c)(2) depends on the particular facts and circumstances of each case. DOL ERISA Regulation 2550.408c-2(b)(1).
    3. The term "reasonable compensation" does not include any compensation to a fiduciary who is already receiving full-time pay from an employer or association of employers or from an employer organization, except for the reimbursement of direct expenses properly and actually incurred and not otherwise reimbursed. These restrictions do not apply to a party in interest who is not a fiduciary. DOL ERISA Regulation 2550.408c-2(b)(2).
    4. An expense is not a direct expense to the extent it would have been sustained had the service not been provided or if it represents an applicable portion of overhead costs. DOL ERISA Regulation 2550.408c-2(b)(3).
    5. The term "reasonable compensation", as applied to a fiduciary or an employee of a plan, includes an advance to such a fiduciary or employee by the plan to cover direct expenses to be properly and actually incurred by such person in the performance of such person's duties with the plan if certain conditions are satisfied. DOL ERISA Regulation 2550.408c-2(b)(4).
  1. Interpretive Bulletins
  2. IB 75-6, relating to Section 408(c)(2), has been superseded by the regulation cited above.

  3. Advisory Opinions
    1. [General] Section 408(c)(2) was inserted in ERISA as an exemption from the Section 406 prohibited transaction rules to enable certain services to be provided to a plan. The clause in Section 408(c)(2) relating to full-time employee receiving solely reimbursement for expenses is a limitation within an exemption from Section 406. AO 75-21.
    2. [General] A fiduciary who receives full-time pay from an employer association acting on behalf of a group of employers as a sponsor of an employee benefit plan where employees of the contributing employers are participants in this plan would be precluded under Section 408(b)(2) from receiving compensation from the plan for his services as a trustee. This is consistent with the legislative history of Section 408(c)(2) wherein Congress expressed an intent to prevent double payment when the sponsoring association, which is supported solely by the contributing employers, already pays the trustee full-time pay. AO 85-19A.
    3. [Form of Compensation] Section 408(c)(2) and the regulations thereunder do not proscribe the payment of compensation to fiduciaries in a form other than cash (e.g, purchase of life insurance), provided the amount of total compensation paid in all forms is reasonable. WSB 78-34.
    4. [Compensation] The manner in which a union, an employer, and an employer association characterize the payments that they make to trustees is not dispositive of the issue of whether those payments constitute full-time pay. WSB 78-36.
    5. [Compensation] When two union trustees are full-time paid union officers, no compensation is permissible under Section 408(c)(2). AO 76-57.
    6. [Compensation] The receipt of compensation by a fiduciary from a plan is a prohibited transaction if the fiduciary is already receiving full-time compensation from the employer maintaining the plan. AO 78-08.
    7. [Compensation] A trustee or fiduciary who is paid by his employer on an hourly basis and who loses wages for time spent in connection with his plan duties will not be deemed to be receiving full-time pay from his employer during those periods of time that he is performing his duties as plan trustee or fiduciary; and he may, therefore, receive compensation from the plan for services rendered in the performance of his duties with the plan. AO 76-03; WSB 79-92; WSB 79-97
    8. [Compensation - Owner] A management representative/trustee who is the owner of a business that is an employer whose employees are participants in the plan may not receive compensation from the plan for services rendered in the performance of his duties with the plan. The trustee's regular full-time pay or compensation will not be diminished for his time spent on plan duties. AO 76-03; WSB 79-92; WSB 79-97.
    9. [Indemnification of Trustee] Reimbursement or payment by the fund, pursuant to certain indemnification provisions, of expenses properly and actually incurred (including reimbursement or payment of expenses properly and actually incurred in settlement of pending or threatened litigation) is not a prohibited transaction under Section 406(a)(1)(B) or (D) to the extent the reimbursement or payment does not exceed amounts allowed under Section 408(c)(2). AO 77-66/67.
    10. [Expenses] Section 408(c)(2) expressly does not preclude reimbursement for expenses properly and actually incurred by any plan fiduciary. AO 75-145.
    11. [Legal Expenses] Reimbursement of a legal defense expenses of Taft-Hartley plan trustees is permitted under certain circumstances. However, a plan provision authorizing reimbursement of legal fees in the event of any legal action that may arise from the performance of a trustee's fiduciary duties is too broad and would be prohibited under Section 408(c)(2). Where a fiduciary is found in legal proceedings to have violated his fiduciary duties, reimbursement of legal fees by the plan would not be permitted (Emphasis added). AO 78-29.
  1. Court Decisions
    1. [Legal Expenses] Absent any finding of breach of fiduciary duty, the reimbursement of litigation expenses incurred by a fiduciary defending against allegations of breach of fiduciary duty is not prohibited by Section 410(a) and, by virtue of Section 408(c)(2), is not a prohibited transaction. Central States Pension Fund v. American National Bank & Trust Co. of Chicago, No. 77 C 4335, slip op. (N.D.Ill., Oct. 26, 1979).
    2. [Commissions] The investment of plan assets in companies in exchange for commissions, equity, or other compensation does not qualify as a Section 408 exempted transaction and, as such, is prohibited by Section 406. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 8 EBC 2457 (2d Cir. 1987).
    3. [Commissions] The payment of a sales commission to a fiduciary on the sale of plan real property is not exempt under Section 408(c)(2) as the fiduciary received full-time pay from the employer. If the commission is characterized as compensation for "extraordinary services", it is not exempt under Section 408(c)(2), since that section exempts only compensation for the performance of fiduciary duties. Marshall v. Kelly, 465 F.Supp. 341, 1EBC 1850 (W.D.Okla. 1978).

Section 408(c)(3)

Nothing in Section 406 shall be construed to prohibit any fiduciary from serving as a fiduciary in addition to being an officer, employee, agent, or other representative of a party in interest.
  1. Conference Report
  2. The Congressional Conference Report does not explain this interpretation.

  3. Advisory Opinions
    1. [General] Section 408(c)(3) has no bearing on the applicability of the fiduciary duties set forth in Section 404(a)(1). The Section also does not deal with possible prohibited transactions that might occur under Section 406(b), depending on the factual situation, when a fiduciary is a director of an investment manager of the plan's assets. AO 76-15.
    2. [Own-Bank Plans] A bank is not prohibited from serving as trustee for a plan maintained for the bank's employees where it receives no compensation from the plan for its trustee services [Emphasis added]. AO 79-49.
    3. [Bank Director] An individual who is a fiduciary of an employee benefit plan because he has authority to appointment the investment manager is not subject to liability under Section 406 merely because he continues to serve as the director of a trust company that has been appointed as an investment manager to manage assets of such plan. AO 76-15.
    4. [Director] A person serving as a director of a fiduciary or a service provider is a representative of a party in interest. As such, he will not be subject to liability under Section 406 merely because he serves as a trustee of a plan while at the same time serving as a director of a bank service provider. AO 77-45.
  1. Court Decisions
    1. The appointment of an officer or employee of the plan sponsor as plan trustee is not improper merely because of the trustee's relationship to the sponsor. Blackmar v. Lichtenstein, 468 F.Supp. 370 (E.D.Mo.), aff'd, 603 F.2d 1306, 1 EBC 1679 (8th Cir. 1979).

Section 408(d)

Section 407(b) and subsections (b), (c) and (e) of this section shall not apply to any transaction in which a plan directly or indirectly -
(1) Lends any part of the corpus or income of the plan to;
(2) Pays any compensation for personal services rendered to the plan to; or
(3) Acquires for the plan any property from or sells any property to;
any person who is with respect to the plan an owner-employee (as defined in section 401(c)(3) of the Internal Revenue Code of 1954), a member of the family (as defined in section 267(c)(4) of such Code) of my such owner-employee, or a corporation controlled by any such owner-employee through the ownership, directly or indirectly, of 50% or more of the combined voting power of all classes of stock entitled to vote or 50% or more of the total value of shares of all classes of stock of the corporation.

For purposes of this subsection a shareholder employee (as defined in section 1379 of the Internal Revenue Code of 1954 as in effect on the day before the date of the enactment of the Subchapter S Revision Act of 1982) and a participant or beneficiary of an individual retirement annuity, or an individual retirement bond (as defined in section 408 or section 409 of the Internal Revenue Code of 1954) and an employer or association of employers which establishes such an account or annuity under section 408(c) of such Code shall be deemed to be an owner-employee.

  1. Conference Report
  2. The Congressional Conference Report does not explain this exception to the scope of the exemptions.

  3. Advisory Opinions
    1. Section 408(d) makes Section 408(b) unavailable for transactions between a plan and a shareholder-employee (as defined in Section 1379(d) of the Internal Revenue Code of 1954) of the plan. The trustees of the plan are, of course, responsible for determining whether the provisions of Section 408(b), or any other section of ERISA, are applicable to the plan. AO 75-105.

Section 408(e)

Sections 406 and 407 shall not apply to the acquisition or sale by a plan of qualifying employer securities (as defined in section 407(d)(5)) or acquisition, sale, or lease by a plan of qualifying employer real property (as defined in section 407(d)(4)) -
(1) If such acquisition, sale, or lease is for adequate consideration (or in the case of a marketable obligation, at a price not less favorable to the plan than the price determined under section 407(e)(1)),
(2) If no commission is charged with respect thereto, and
(3) If -
  (A) The plan is an eligible individual account plan (as defined in section 407(d)(3)), or
  (B) In the case of an acquisition or lease of qualifying employer real property by a plan which is not an eligible individual account plan, or of an acquisition of qualifying employer securities by such a plan, the lease or acquisition is not prohibited by section 407(a).
  1. Conference Report
  2. The Congressional Conference Report explains this employer security and real property exemption at pages 316-320.

  3. Regulations
  4. See DOL ERISA Regulation 2550.408e.

  5. Advisory Opinions
    1. [General] For the exemption provided by Section 408(e) to apply to any sale, the property being sold must be either qualifying employer securities or qualifying employer real property at the time such securities or property are sold by the plan. If a corporation is not a member of a controlled group prior to the consummation of a sale, the corporation's securities will not be securities of an affiliate prior to the sale (Emphasis added). AO 77-18.
    2. [Employer Real Estate] Section  408(e) is not applicable where the property is not "qualifying employer real property" (Emphasis added). AO 76-14.
    3. [Individual Account Plan] An exchange of employer common stock by an eligible individual account plan for stock of a new parent company is covered by Section 408(e). AO 78-22.
    4. [Individual Account Plan] The exemption provided in Section 408(e) is available to an eligible individual account plan only if the conditions set forth in that section are met. AO 79-13 and AO 79-23. The exemption is not affected by the exercise of control by a participant or beneficiary over the assets in his individual account. AO 75-89.
    5. [Employer Securities] The prohibited transaction restrictions of Section 406 of ERISA do not apply to a company's repurchase of its stock from its employee benefit plan, provided that the three conditions of Section 408(e) are met. However, the Department will not opine as to whether a particular transaction is for adequate compensation. AO 81-46A.
    6. [Employer Securities] The acquisition by the plan of preferred stock of the plan sponsor in payment of a debt owned by the plan sponsor corporation to the plan, and the further acquisition by the plan of the plan sponsor's preferred stock in exchange for the plan sponsor's common stock held by the plan, constitute acquisitions within the meaning of Section 408(e). AO 81-33A.
    7. [Valuation - Employer Securities] ERISA Section 3(18) defines the term "adequate consideration", in the case of a security for which there is no generally recognized market, as the fair value of the security determined in good faith by the trustee or named fiduciary to a plan pursuant to the terms of the plan and in accordance with regulations promulgated by the Department of Labor. The Department of Labor has not yet issued such regulations and does not, at the present time, contemplate making advance determinations as to adequate consideration in the case of individual purchases and sales of stock. Guidelines to be issued will be general guidelines in the form of regulations under Section 3(18). In view of the fact that no regulations have been issued under Section 3(18), the plan advisory committee should make a good faith determination of the fair market value of the common stock of the employer maintaining the plan, utilizing recognized methods of determining the value of stock of closely held corporations. AO 75-141.
    8. [Valuation - Employer Securities] In view of the fact that no regulations have been issued under Section 3(18), the trustee should make a good faith determination of the fair market value of the book value shares, utilizing recognized methods of determining the value of such shares. The ruling received by the trustee from the Internal Revenue Service as to where the method of determining fair market value of the book value shares was a reasonable one for purposes of Section 1.421-7(e)(2) of the Income Tax Regulations would be considered as evidence that the trustee determining of fair market value was made in good faith. AO 77-35.

Section 408(f)

Section 406(b)(2) shall not apply to any merger or transfer described in subsection (b)(11).

Exculpatory Provisions; Insurance

ERISA Section 410

Section 410(a)

Exculpatory Provisions

Except as provided in sections 405(b)(1) and 405(d), any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy.
  1. Conference Report
  2. The Congressional Conference Report discusses the exculpatory provision prohibition.

  3. Interpretive Bulletins
    1. Indemnification agreements are not prohibited if the fiduciary who may be indemnified under the agreement remains responsible and liable for his acts or omissions with the indemnifying party merely satisfying the fiduciary liability. For example, an employer or union may agree to indemnity a plan fiduciary under Section 410(a). Also, a fiduciary can agree to indemnity his employees who perform fiduciary functions for a plan. However, a plan cannot agree to indemnify a fiduciary for a breach of fiduciary duty. IB 75-4.
  1. Advisory Opinions
    1. [Exculpatory Clauses] An exculpatory clause that appears in a plan instrument is void even if the plan is not amended to remove the clause. AO 75-122.
    2. [Exculpatory Clauses] Any provision in a plan instrument purporting to relieve the trustees of the duty to collect contributions is void under Section 410(a). AO 78-28.
    3. [Indemnification] Indemnification by a multiemployer plan of an investment manager's defense costs and settlement payment is permitted in a lawsuit alleging a breach of fiduciary duty by the investment manager, provided that (1) no court decision was rendered that the investment manager had breached his fiduciary duties; (2) the defense costs indemnified did not exceed a reasonable amount and (3) an opinion is obtained from independent legal counsel that the acts in question did not involve a breach of fiduciary duty by the investment manager. AO 77-66/67.
    4. [Indemnification] An advance or reimbursement by a plan of expenses incurred by a plan fiduciary in defending a lawsuit alleging a breach of fiduciary duty is not a prohibited transaction, provided (1) no reimbursement is made or any advances repaid if a court rules that a breach has occurred; and (2) the advance or reimbursement is for expenses properly and actually incurred (see DOL ERISA Regulation 2550.408c-2). AO 77-66/67.
    5. [Indemnification] Reimbursement of the legal defense expenses of Taft-Hartley plan trustees is permitted under certain circumstances. However, a plan provision authorizing reimbursement of legal fees in the event of any legal action that may arise from the performance of a trustee's fiduciary duties is too broad and would be prohibited under Section 410(a). Where a fiduciary is found in a legal proceeding to have violated his fiduciary duties, reimbursement of legal fees by the plan would not be permitted. AO 78-29.
  1. Court Decisions
    1. Absent any finding of breach of fiduciary duty, the reimbursement of litigation expenses incurred by a fiduciary in defending against allegations of breach of fiduciary duty is not prohibited by Section 410(a) and, by virtue of Section 408(c)(2), is not a prohibited transaction. Central States Pension Fund v. American National Bank & Trust Co. of Chicago, No. 77 C 4335, slip op. (N.D.Ill., Oct. 26, 1979).
    2. Where a pension plan contains a provision to indemnify members of the board of directors, plan administrative committee, trustee and any other person to whom fiduciary responsibility was allocated from liability for a breach of fiduciary duty, except for liabilities and claims arising from willful misconduct, the indemnity agreement is void under ERISA Section 410(a). Donovan v. Cunningham, 541 F.Supp. 276, 3 EBC 1641 (S.D.Tex. 1982), aff'd in part, rev'd in part, 716 F.2d 1455, 4 EBC 2329 (5th Cir. 1983), cert. denied, 467 U.S. 1251 (1984).
    3. A successor trustee cannot be exonerated by the provisions of a trust agreement from his duty to liquidate prior improper investments upon assuming his responsibilities. Marshall v. Craft, 463 F.Supp. 493 (N.D.Ga. 1978).
    4. Even though a plan trustee has no authority for investment decisions, it cannot disavow itself of a responsibility for such decision since it is still a fiduciary. However, under the allocation provisions of Section 405(c)(1) the trustee may not, in fact, be liable for such decisions. Leonard v. Drug Fair, Inc., Fed. Sec. L. Rep. (CCH) Para 97,144 (D.D.C. 1979).
    5. Where a pension plan was challenged under ERISA Section 410(a) because the summary plan descriptions contained disclaimers, the widow of a deceased employee could not maintain a private action since she was not a beneficiary as defined in ERISA. Trembly v. Marshall, 502 F.Supp. 29, 2 EBC 2500 (D.D.C. 1980).

Section 410(b)

Insurance

Nothing in this subpart shall preclude -
(1) A plan from purchasing insurance for its fiduciaries or for itself to cover liability or losses occurring by reason of the act or omission of a fiduciary, if such insurance permits recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by such fiduciary;
(2) A fiduciary from purchasing insurance to cover liability under this part from and for his own account; or
(3) An employer or an employee organization from purchasing insurance to cover potential liability of one or more persons who serve in a fiduciary capacity with regard to an employee benefit plan.
  1. Conference Report
  2. The Congressional Conference Report discusses the fiduciary insurance provisions of Section 410(b) at pages 320-321.

  3. Regulations
  4. No regulations have been issued interpreting Section 410(b). However, in a news release issued on March 4, 1975, the Department of Labor stated that fiduciary insurance purchased by a plan that provides for recourse by the insurer against the fiduciary but that also permits the fiduciary to pay an additional premium to obtain coverage against the insurer's recourse is not prohibited under Section 410(b).

  5. Advisory Opinions
    1. Section 410(b) does not require plans to maintain fiduciary insurance. AO 76-03.

Bonding of Fiduciaries

ERISA Section 412

Section 412

(a) Every fiduciary of an employee benefit plan and every person who handles funds or other property of such plan (hereinafter in this section referred to as "plan official") shall be bonded as provided in this section; except that-
  (1) Where such plan is one under which the only assets from which benefits are paid are the general assets of a union or of an employer, the administrator, officers, and employees of such plan shall be exempt from the bonding requirements of this section, and
  (2) No bond shall be required of a fiduciary (or of any director, officer, or employee of such fiduciary) if such fiduciary -
    (A) Is a corporation organized and doing business under the laws of the United States or any State;
    (B) Is authorized under such laws to exercise trust powers or to conduct an insurance business;
    (C) Is subject to supervision or examination by Federal or State authority; and
    (D) Has at all times a combined capital and surplus in excess of such a minimum amount as may be established by regulations issued by the Secretary, which amount shall be at least $1,000,000. Paragraph (2) shall apply to a bank or other financial institution which is authorized to exercise trust powers and the deposits of which are not insured by the Federal Deposit Insurance Corporation, only if such bank or institution meets bonding or similar requirements under State law which the Secretary determines are at least equivalent to those imposed on banks by Federal law.

The amount of such bond shall be fixed at the beginning of each fiscal year of the plan. Such amount shall not be less than 10 per centum of the amount of funds handled. In no case shall such bond be less than $1,000 nor more than $500,000, except that the Secretary, after due notice and opportunity for hearing to all interested parties, and after consideration of the record, may prescribe an amount in excess of $500,000, subject to the 10 per centum limitation of the preceding sentence.

      For purposes of fixing the amount of such bond, the amount of funds handled shall be determined by the funds handled by the person, group, or class to be covered by such bond and by their predecessor or predecessors, if any, during the preceding reporting year, or if the plan has no preceding reporting year, the amount of funds to be handled during the current reporting year by such person, group, or class, estimated as provided in regulations of the Secretary.

Such bond shall provide protection to the plan against loss by reason of acts of fraud or dishonesty on the part of be plan official, directly or through connivance with others. Any bond shall have as surety thereon a corporate surety company which is an acceptable surety on Federal bonds under authority granted by the Secretary of the Treasury pursuant to sections 9304-9308 of title 31. Any bond shall be in a form or of a type approved by the Secretary, including individual bonds or schedule of blanket forms of bonds which cover a group or class.

(b)

It shall be unlawful for any plan official to whom subsection (a) applies, to receive, handle, disburse, or otherwise exercise custody of any of the funds or other property of any employees benefit plan, without being bonded as required by subsection (a) and it shall be unlawful for any plan official of such plan, or any other person having authority to direct the performance of such functions, to permit such functions, or any, of them, to be performed by any plan official, with respect to whom the requirements of subsection (a) have not been met.

(c) It shall be unlawful for any person to procure any bond required by subsection (a) from any surety or other company or through any agent or broker in whose business operations such plan or any party in interest in such plan has any control or significant financial interest, direct or indirect.
(d) Nothing in any other provision of law, shall make any person, required to be bonded as provided in subsection (a) because he handles funds or other property of an employee benefit plan, to be bonded insofar as the handling by such person of the funds or other property of such plan is concerned.
(e) The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section including exempting a plan from the requirements of this section where he finds that (1) other bonding arrangements or (2) the overall financial condition of the plan would be adequate to protect the interests of the beneficiaries and participants. When, in the opinion of the Secretary, the administrator of a plan offers adequate evidence of the financial responsibility of the plan, or that other bonding arrangements would provide adequate protection of the beneficiaries and participants, he may exempt such plan from the requirements of this section.
  1. Conference Report
  2. The Congressional Conference Report discusses the bonding requirements of ERISA.

  3. Regulations
    1. The temporary regulations generally incorporated by reference the bonding regulations issued under Section 13 of the Welfare and Pension Plans Disclosure Act (WPPDA). ERISA Regs. 2550.412-1. WPPDA Regulation Section 464 (29 C.F.R. 464).
    2. Section 464.5 of the WPPDA regulations provides that the term "funds or other property" [see ERISA 412(a)] includes all property that is to be used by a plan as a source for paying benefits; however, it does not include, among other things, fixed assets used in the operation of a plan (e.g., a building used as office space by a plan).
    3. Section 464.6 of the WPPDA regulations provides that in the case of multiemployer plans, employer contributions become plan funds when they are actually received by the plan.
    4. Section 464.7 of the WPPDA regulations indicates the following regarding persons who handle funds or other property:
  1. Generally, a person handles plan funds or other property, when he has a relationship to funds or property that can rise to risk of loss through fraud or dishonesty. DOL WPPDA Regulation 464.7(a)(1).
  2. However, a person is not deemed to be handling where the risk of loss is negligible (e.g., where the person is handling checks, securities or title papers that he cannot negotiate). DOL WPPDA Regulation 464.7(a)(2).
  3. The power to withdraw funds from a bank account generally constitutes handling, regardless of whether the power is authorized. DOL WPPDA Regulation 464.7(b)(2).
  4. Having the authority to transfer ownership of plan assets to others constitutes handling. DOL WPPDA Regulation 464.7(b)(3).
  5. Persons who disburse plan funds or sign plan checks are handling plan funds. DOL WPPDA Regulation 464.7(b)(4).
  6. In the case of fully insured plans, there is generally no handling of plan funds or other assets, unless benefit payments, dividends, etc., are paid to the plan by the insurance company. DOL WPPDA Regulation 464.7(b)(7).
  1. Interpretive Bulletins
    1. A person who provides investment advice to a plan but does not handle plan funds or other property is not required to be bonded under Section 412. IB 75-5, Question FR-8.
    2. A plan can purchase a bond covering plan officials, but the bond must be solely for the protection of the plan. IB 75-5, Question FR-9.
    3. Even though a person is not a plan fiduciary, he may be subject to the bonding requirements of Section 412 if he handles plan funds or other property. IB 75-8, Question D-2.
  1. Advisory Opinions
    1. The Labor Department cannot postpone the applicability of the bonding requirements to any plan. AO 75-120.
    2. There is no provision in Section 412 exempting plans with a minimum number of participants from the bonding requirements. AO 75-117.
    3. Section 412(a) requires coverage only against fraud or dishonesty; it does not require errors and omissions coverage. AO 75-124.
    4. A plan official is not required to be bonded unless he handles funds or other property. Handling occurs whenever the duties or activities of a plan official are such that there is a risk that such funds or other property could be lost in the event of fraud or dishonesty on the part of such person, acting either alone or in collusion with others. The authorization of disbursements may constitute handling, depending on the facts in a particular case. The factors that are considered include the closeness and continuity of supervision; who is, in fact, charged with or actually exercises final responsibility for determining whether specific disbursements or benefit claims are bona fide, regular and made in accordance with the applicable trust instrument or other documents; and who has the final responsibility for determining the propriety of any specific expenditure. AO 77-84.
    5. An impartial chairman of a joint board of trustees who is only given full trustee voting authority to resolve disputes between trustees is handling plan funds or other property. AO 75-119.
    6. Plan assets deposited in a savings account are not required to be bonded under Section 412. AO 77-11 and AO 79-10.
    7. A person who (a) receives insurance policies from the plan trustees or participants for transmissions to the insurance company and (b) handles premium checks made out to the insurance carrier or receives checks made out to the plan trustees from the insurance company (but has no authority to negotiate these checks) is not handling plan funds or other property. AO 76-47.
    8. The sale of a group insurance policy to an employer to fund a plan does not alone make the insurance company a party in interest to the plan. Therefore, the insurance company is not prohibited under Section 12(c) from selling a bond to the plan. AO 76-36.
    9. The administrator of a plan cannot sell a bond to the plan under Section 412(c). The exemptions provided in Sections 408 and 414(c) apply only to prohibited transactions, not to the bonding restrictions. AO 76-92.
  1. Court Decisions
    1. A fiduciary who is not bonded is legally disqualified from serving as a fiduciary. Lane v. Marshall, Civ. A. No. 79-0868 (N.D.Cal., April 28,1979).
    2. Posting of government obligations in lieu of corporate surety bond does not fulfill ERISA Section 412 bonding requirement. Musso v. Baker, 834 F.2d 78, 9 EBC 1145 (3d Cir. 1987), cert. denied, 101 L.Ed.2d 884, 1988 U.S. LEXIS 2840, 108 S.Ct. 2846, 56 U.S.L.W. 3864, 9 EBC 2304 (U.S. 1988) (where fund trustees deposited fund-owned federal government obligations).


Last Updated 04/02/2008

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