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Trust Examination Manual
December 14, 2001
Mr. James M. Winn
Smith & Downey
1110 Vermont Ave., NW, Suite 400
Washington, DC 20005
ERISA Sec. 408(b)(2) & 408(b)(6)
Dear Mr. Winn:
This is in response to your letter requesting an advisory opinion under the Employee Retirement Income Security Act of 1974, as amended (ERISA). In particular, you request an opinion that the provision of trustee services by Laurel Trust Company (Laurel) to two defined benefit pension plans sponsored by Laurel (the Plans), and the payment by the Plans of Laurel’s standard trustee fees would be exempt from ERISA’s prohibited transaction provisions by reason of section 408(b)(6) of ERISA.(1)
Your letter contains the following representations. Laurel provided trustee services to the Plans and charged its customary trustee fees for such services. Laurel assumed that the provision of such services and the receipt of the fees was exempted from the prohibited transactions provisions of section 406 of ERISA by reason of section 408(b)(6). You represent that in 1996, the Department of Labor (the Department) determined that this arrangement constituted a violation of section 406 of ERISA and imposed on Laurel (then known as BT Management Trust Company) a civil penalty under section 502(l) of ERISA. Laurel petitioned the Department for a waiver or reduction of the civil penalty, which was denied. Laurel paid the civil penalty and ceased charging its customary fees to the Plans. Citing a 1993 IRS Field Service Advice Memorandum, which you believe takes a view contrary to that of the Department, you have requested that the Department reconsider its position with respect to section 408(b)(6) of ERISA.
Laurel contends that section 406 of ERISA does not prohibit the Plans from paying Laurel its customary trustee fees, which are the same fees paid by plans sponsored by parties unrelated to Laurel. You represent that such fees represent reasonable compensation for services, which plans are permitted to pay, even if those fees include a profit component. You recognize that ERISA section 406 would otherwise prohibit the payment of such fees, but claim that the statutory exemption provided by section 408(b)(6) permits the payment of the fees by the Plans to Laurel.
Section 406(a)(1)(C) and (D) of ERISA provides that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if the fiduciary knows or should know that such transaction constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a party in interest or a transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Section 406(b)(1) of ERISA provides that a fiduciary with respect to a plan shall not deal with plan assets in his own interest or for his own account. Section 406(b)(2) of ERISA prohibits a fiduciary with respect to a plan from acting 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 of its participants and beneficiaries.
Section 408(b)(6) of ERISA provides that the prohibitions of section 406 shall not apply to the provision of any ancillary service by a bank or similar financial institution supervised by the United States or a State, if such bank or financial institution is a fiduciary of such plan, provided that certain conditions are satisfied.
You represent that Laurel, as a Pennsylvania state-chartered trust company, is a “bank or similar financial institution” that is supervised by a State. You further represent that the provision of services to and payment of fees by the Plans satisfies the other conditions of ERISA section 408(b)(6).
You claim that the Department has previously concluded that a plan’s payment of fees that include a profit component is not “reasonable compensation,” as that term is used in both section 408(b)(2) and 408(b)(6) of ERISA. You further claim that the Internal Revenue Service (IRS) has taken a contrary position with respect to section 4975(d)(6) of the Internal Revenue Code of 1986 (the Code), a parallel provision to ERISA section 408(b)(6), in a 1993 Field Service Advice Memorandum (Memorandum), a copy of which you included with your letter. Pursuant to section 102 of Reorganization Plan No. 4 of 1978 (see, footnote 1, above), all authority to issue regulations, rulings, interpretations, and exemptions under section 4975(d) of the Code, with exceptions not here relevant, was transferred to the Department. The Department, therefore, has sole authority and responsibility to interpret section 4975(d)(6) of the Code.
Section 408(b)(6) of ERISA (and by reference, section 4975(d)(6) of the Code, see, footnote 1, above) exempts from the prohibited transaction provisions of ERISA the provision of “ancillary” services to a plan by a fiduciary that is a bank or similar financial institution supervised by the United States or a State and the payment of no more than “reasonable compensation” by the plan. It is the opinion of the Department that trustee services are not ancillary services.
Trustee services are necessary and essential to the establishment, maintenance, and operation of a pension plan that is subject to ERISA. Section 403(a) of ERISA requires that, subject to several exceptions not relevant here, all assets of an employee benefit plan shall be held in trust by one or more trustees. The trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan, except to the extent that the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not a trustee, in which case the trustees shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to ERISA, or to the extent that authority to manage, acquire, or dispose of assets of the plan is delegated to one or more investment managers. In the Department’s view a service is “ancillary” if it aids or is auxiliary to a primary or principal service. For instance, the Department has stated that the provision of “sweep services” by a trustee who is subject to direction from an independent investment manager for the investment of plan assets, may constitute an “ancillary service” within the meaning of section 408(b)(6).(2) Given the central role that the establishment of a trust and the naming of a trustee plays in the establishment, maintenance, and operation of an employee benefit plan, the Department concludes that trustee services cannot be “ancillary services” within the meaning of ERISA section 408(b)(6).
Section 408(b)(2) of ERISA exempts from the prohibitions of section 406(a) any contract or reasonable arrangement with a party in interest, including a fiduciary, 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. Regulations issued by the Department clarify the terms "necessary service" (29 CFR §2550.408b-2(b)), "reasonable contract or arrangement" (29 CFR §2550.408b-2(c)) and "reasonable compensation" (29 CFR §2550.408b-2(d) and 2550.408c-2) as used in section 408(b)(2). As a general matter, whether the requirements of that section are met in each case involves questions which are inherently factual in nature. Pursuant to section 5.01 of ERISA Procedure 76-1, the Department ordinarily does not issue opinions on such matters. The Department has not concluded, however, that fees including a profit component necessarily exceed reasonable compensation.
With respect to the prohibitions in section 406(b), the regulation under section 408(b)(2) of ERISA (29 CFR §2550.408b-2(a)) states that section 408(b)(2) of ERISA does not contain an exemption for an act described in section 406(b) even if such act occurs in connection with a provision of services that is exempt under section 408(b)(2).
As explained in regulation 29 CFR §2550.408b-2(e)(1), the prohibitions of section 406(b) are imposed upon fiduciaries to deter them from exercising the authority, control, or responsibility that makes them fiduciaries when they have interests that may conflict with the interests of the plans for which they act. Thus, a fiduciary may not use the authority, control, or responsibility that makes him a fiduciary to cause a plan to pay an additional fee to such fiduciary, or to a person in which he has an interest that may affect the exercise of his best judgment as a fiduciary, to provide a service. However, regulation 29 CFR §2550.408b-2(e)(2) provides that a fiduciary does not engage in an act described in section 406(b)(1) of ERISA if the fiduciary does not use any of the authority, control, or responsibility that makes him a fiduciary to cause a plan to pay additional fees for a service furnished by such fiduciary or to pay a fee for a service furnished by a person in which the fiduciary has an interest that may affect the exercise of his judgment as a fiduciary. Furthermore, regulation section 2550.408b-2(e)(3) explains that if a fiduciary provides services to a plan without the receipt of compensation or other consideration other than the reimbursement of direct expenses properly and actually incurred in the performance of such services, the provision of such services does not, in and of itself, constitute an act described in section 406(b) of ERISA. Regulation section 2550.408c-2(b)(3) provides that an expense is not a direct expense to the extent that it would have been sustained had the service not been provided or if it represents an allocable portion of overhead.
Accordingly, it is the opinion of the Department that if Laurel provides trustee services to the Plans and charges the Plans a fee that exceeds the direct expenses that Laurel incurs in the provision of trustee services to the Plans, it would engage in violations of ERISA section 406(b)(1) and (2), which would not be exempted by ERISA section 408(b)(2) or (6).
This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, this letter is issued subject to the provisions of the procedure, including section 10 relating to the effect of advisory opinions.
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations