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Trust Examination Manual
Appendix E Employee Benefit Law
Pension and Welfare Benefits Administration
Washington, D.C. 20210
August 20, 1997
Judith A. McCormick
Senior Trust Counsel
American Bankers Association
1120 Connecticut Avenue, N.W.
Washington, D.C. 20036
Dear Ms. McCormick:
This is in response to your request for an information letter on behalf of the American Bankers Association (ABA), confirming that the principles enunciated in Advisory Opinions 97-15A and 97-16A (May 22, 1997) would apply in the case of a bank that acts as a directed trustee of an employee benefit plan. A.O. 97-15A concerned a bank that served both as a directed trustee and as a trustee with investment discretion. A.O. 97-16A involved a plan recordkeeper. Both opinions addressed the receipt of fees by the trustee or recordkeeper from mutual funds (or their distributors or investment advisors) in connection with the investment of plan assets in the mutual funds as part of a combined program of investment options and services offered to plans, commonly referred to as a "bundled services" product.
In general, you have described a typical "bundled services" product as a comprehensive program of administrative, custodial, and investment services offered by affiliated and non-affiliated entities to pension plans, most typically participant-directed defined contribution plans. Such a program may be offered by a single financial institution or through an arrangement in which multiple vendors contract with each other to offer a bundle of plan services. The plan services typically include, but are not limited to, custodial trustee services, participant level record-keeping, participant communications and educational materials and programs, voice response system access to accounts for participants, plan documentation, including prototype plans, summary plan descriptions and annual reports, tax compliance assistance, administrative assistance in processing plan distributions and loans, and a menu of investment options, typically consisting of mutual funds from one or more mutual fund families.
You described typical situations in which a financial institution (the bank) may offer to plans a bundled services product in which it acts as a directed trustee and which includes as investment options mutual funds from one or more mutual fund families. Pursuant to the banks contracts with the mutual funds (or their distributors or investment advisors), the bank may provide subtransfer agent, administrative and/or shareholder services to or on behalf of the mutual funds in connection with the purchase of mutual fund shares by the plans. In return for these services, the mutual fund (or its distributor or investment advisor) pays a fee to the bank (frequently pursuant to a plan adopted under Securities and Exchange Commission Rule 12b-1) based on percentage of the mutual funds assets attributable to plan investments in the fund. Generally, the bank reserves the right to add, delete, or substitute individual mutual funds or mutual fund families to or from the investment menu, but otherwise has and exercises no investment discretion.
In A.O. 97-15A, the Department explained that, although a directed trustee is necessarily a fiduciary, if the trustee acts pursuant to a direction in accordance with section 403(a)(1) or 404(c) of ERISA, and does not exercise any authority or control to cause a plan to invest in a mutual fund, the mere receipt by the trustee of a fee or other compensation from the mutual fund in connection with such investment would not in and of itself violate sections 406(b)(1) or (b)(3). The Department indicated, however, that because the trustee in that case had reserved the right to add or remove mutual fund families that it made available to the plans, the Department could not conclude that the trustee would not exercise any discretionary authority or control to cause the plans to invest in mutual funds that pay a fee or other compensation to the trustee. The Department further noted that the trustee in that case fully disclosed to the plans its fee arrangements with the mutual fund families, and agreed to apply any fees it received from the mutual funds to the benefit of the plans, either as a dollar-for-dollar offset against the fees the plans were obligated to pay for trustee or recordkeeping services, or as amounts credited directly to the plans. Under these circumstances, the Department concluded that the trustee would not violate sections 406(b)(1) or (b)(3) because it would not be dealing with plan assets in its own interest or for its own account, or receiving the payments from the mutual funds for it s own personal account.
In A.O. 97-16A, the Department opined that a recordkeeper that offered plans a bundled services product would not exercise discretionary authority or control over the management of a plan or its assets solely as a result of deleting or substituting a mutual fund from its program of investment options and services it offered to the plans, provided that the appropriate plan fiduciary in fact makes the decision to accept or reject the change. The Department emphasized that, in order to be able to make that decision, the plan fiduciary must be provided advance notice of the change, including any changes in the fees received by the recordkeeper, and afforded a reasonable period of time within which to decide whether to accept or reject the change and, in the event of a rejection, secure a new service provider. In that case, the recordkeeper provided at least 120 days following notice of a proposed change in funds within which to reject the change and secure a new service provider. The Department noted, however, that what constitutes a reasonable period of time within which to terminate a bundled services arrangement and change service providers is inherently a factual question which must be determined by the appropriate plan fiduciary in light of the particular facts and circumstances in each case.
The opinions expressed in A.O. 97-15A and A.O. 97-16A are limited to the facts presented and may be relied upon only by the parties to whom they were issued. See Advisory Opinion Procedure 76-1, Section 10, 41 Fed. Reg. 36281 (Aug. 27, 1976). Nevertheless, it is the view of the Department that the foregoing legal principles, as expressed in A.O. 97-15A and A.O. 97-16A, would apply in the case of a bank that serves as a directed trustee for employee benefit plans in the context of a bundled services product as described above.
We hope that this information is helpful to you.
Bette J. Briggs
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations