Home > Regulation
& Examinations >
Bank Examinations >Trust Examination Manual
Trust Examination Manual
Appendix E Employee Benefit Law
Interpretive Bulletin 94-1
June 23, 1994 (59 FR 32606)
Agency: Pension and Welfare Benefits Administration, Labor Department
Action: Interpretive Bulletin
Summary: This document sets forth the view of the Department of Labor (the Department) concerning the legal standard imposed by sections 403 and 404 of Part 4 of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) with respect to a plan fiduciary's decision to invest plan assets in "economically targeted investments" (ETIs). ETIs are generally defined as investments that are selected for the economic benefits they create in addition to the investment return to the employee benefit plan investor. In this document, the Department states that the requirements of sections 403 and 404 do not prevent plan fiduciaries from deciding to invest plan assets in an ETI if the ETI has an expected rate of return that is commensurate to rates of return of alternative investments with similar risk characteristics that are available to the plan, and if the ETI is otherwise an appropriate investment for the plan in terms of such factors as diversification and the investment policy of the plan.
Effective Date: January 1, 1975
Interpretive Bulletin Relating to the fiduciary standard under ERISA
in considering economically targeted investments
This Interpretive Bulletin sets forth the Department of Labor's interpretation of sections 403 and 404 of the Employee Retirement Income Security Act of 1974 (ERISA), as applied to employee benefit plan investments in "economically targeted investments" (ETIs), that is, investments selected for the economic benefits they create apart from their investment return to the employee benefit plan. Sections 403 and 404, in part, require that a fiduciary of a plan act prudently, and to diversify plan investments so as to minimize the risk of large losses, unless under the circumstances, it is clearly prudent not to do so. In addition, these sections require that a fiduciary act solely in the interest of the plan's participants and beneficiaries and for the exclusive purpose of providing benefits to their participants and beneficiaries. The Department has construed the requirements that a fiduciary act solely in the interest of, and for the exclusive purpose of providing benefits to, participants and beneficiaries as prohibiting a fiduciary from subordinating the interests of participants and beneficiaries in their retirement income to unrelated objectives.
With regard to investing plan assets, the Department has issued a regulation, at 29 C.F.R. 2550.404a-1, interpreting the prudence requirements of ERISA as they apply to the investment duties of fiduciaries of employee benefit plans. The regulation provides that the prudence requirements of section 404(a)(1)(B) are satisfied if -
This includes giving appropriate consideration to the role that the investment or investment course of action plays (in terms or such factors as diversification, liquidity and risk/return characteristics) with respect to that portion of the plan's investment portfolio within the scope of the fiduciary's responsibility.
Other facts and circumstances relevant to an investment or investment course of action would, in the view of the Department, include consideration of the expected return on alternative investments with similar risks available to the plan. It follows that, because every investment necessarily causes a plan to forgo other investment opportunities, an investment will not be prudent if it would be expected to provide a plan with a lower rate of return than available alternative investments with commensurate degrees of risk or is riskier than alternative available investments with commensurate rates of return.
The fiduciary standards applicable to ETIs are no different than the standards applicable to plan investments generally. Therefore, if the above requirements are met, the selection of an ETI, or the engaging in an investment course of action intended to result in the selection of ETIs, will not violate section 404(a)(1)(A) and (B) and the exclusive purpose requirements of section 403.
Interpretive Bulletin 94-2
July 29, 1994 (59 FR 38860)
Agency: Department of Labor.
Action: Interpretive Bulletin.
Summary: This document summarizes the Department of Labor's (the
Department) statements with respect to the duty of employee benefit plan fiduciaries to vote proxies appurtenant to shares of corporate stock held by their plans. In these statements, the Department has explained, among other things, that the voting of proxies is a fiduciary act of plan asset management This document also describes the Department's view of the legal standards imposed by sections 402(c)(3), 403(a) and 404(a)(1)(B) of part 4 of title I of the Employee Retirement Income Security Act of 1974 (ERISA) on the use of written statements of investment policy, including statements of proxy voting policy or guidelines. The bulletin makes clear that a named fiduciary who appoints an investment manager may, consistent with its fiduciary obligations, issue written statements of investment policy, including guidelines as to the voting of proxies by the investment manager. Moreover, an investment manager may be required to comply with such investment policies to the extent that any given investment decision (including a proxy voting decision) is consistent with the provisions of title I or title IV of ERISA. Finally, this document provides guidance concerning the appropriateness under ERISA of more active monitoring of corporate management by fiduciaries of plans that own corporate securities.
Effective Date: January 1, 1975
This interpretive bulletin sets forth the Department of Labor's (the Department) interpretation of sections 402, 403 and 404 of the Employee Retirement Income Security Act of 1974 (ERISA) as those sections apply to voting of proxies on securities held in employee benefit plan investment portfolios and the maintenance of and compliance with statements of investment policy, including proxy voting policy. In addition, this interpretive bulletin provides guidance on the appropriateness under ERISA of active monitoring of corporate management by plan fiduciaries.
The fiduciary act of managing plan assets that are shares of corporate stock includes the voting of proxies appurtenant to those shares of stock. As a result, the responsibility for voting proxies lies exclusively with the plan trustee except to the extent that either (1) the trustee is subject to the directions of a named fiduciary pursuant to ERISA § 403(a)(1); or (2) the power to manage, acquire or dispose of the relevant assets has been delegated by a named fiduciary to one or more investment managers pursuant to ERISA § 403(a)(2). Where the authority to manage plan assets has been delegated to an investment manager pursuant to § 403(a)(2), no person other than the investment manager has authority to vote proxies appurtenant to such plan assets except to the extent that the named fiduciary has reserved to itself (or to another named fiduciary so authorized by the plan document) the right to direct a plan trustee regarding the voting of proxies. In this regard, a named fiduciary, in delegating investment management authority to an investment manager, could reserve to itself the right to direct a trustee with respect to the voting of all proxies or reserve to itself the right to direct a trustee as to the voting of only those proxies relating to specified assets or issues.
If the plan document or investment management agreement provides that the investment manager is not required to vote proxies, but does not expressly preclude the investment manager from voting proxies, the investment manager would have exclusive responsibility for voting proxies. Moreover, an investment manager would not be relieved of its own fiduciary responsibilities by following directions of some other person regarding the voting of proxies, or by delegating such responsibility to another person. If, however, the plan document or the investment management contract expressly precludes the investment manager from voting proxies, the responsibility for voting proxies would lie exclusively with the trustee. The trustee, however, consistent with the requirements of ERISA § 403(a)(1), may be subject to the directions of a named fiduciary if the plan so provides.
The fiduciary duties described at ERISA § 404(a)(1)(A) and (B), require that, in voting proxies, the responsible fiduciary consider those factors that may affect the value of the plan's investment and not subordinate the interests of the participants and beneficiaries in their retirement income to unrelated objectives. These duties also require that the named fiduciary appointing an investment manager periodically monitor the activities of the investment manager with respect to the management of plan assets, including decisions made and actions taken by the investment manager with regard to proxy voting decisions. The named fiduciary must carry out this responsibility solely in the interest of the participants and beneficiaries and without regard to its relationship to the plan sponsor.
It is the view of the Department that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring. Thus, the investment manager or other responsible fiduciary would be required to maintain accurate records as to proxy voting. Moreover, if the named fiduciary is to be able to carry out its responsibilities under ERISA § 404(a) in determining whether the investment manager is fulfilling its fiduciary obligations in investing plans assets in a manner that justifies the continuation of the management appointment, the proxy voting records must enable the named fiduciary to review not only the investment manager's voting procedure with respect to plan-owned stock, but also to review the actions taken in individual proxy voting situations.
The fiduciary obligations of prudence and loyalty to plan participants and beneficiaries require the responsible fiduciary to vote proxies on issues that may affect the value of the plan's investment. Although the same principles apply for proxies appurtenant to shares of foreign corporations, the Department recognizes that in voting such proxies, plans may, in some cases, incur additional costs. Thus, a fiduciary should consider whether the plan's vote, either by itself or together with the votes of other shareholders, is expected to have an effect on the value of the plan's investment that will outweigh the cost of voting. Moreover, a fiduciary, in deciding whether to purchase shares of a foreign corporation, should consider whether the difficulty and expense in voting the shares is reflected in their market price.
The maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA § 404(a)(1)(A) and (B). Since the fiduciary act of managing plan assets that are shares of corporate stock includes the voting of proxies appurtenant to those shares of stock, a statement of proxy voting policy would be an important part of any comprehensive statement of investment policy. For purposes of this document, the term "statement of investment policy" means a written statement that provides the fiduciaries who are responsible for plan investments with guidelines or general instructions concerning various types or categories of investment management decisions, which may include proxy voting decisions. A statement of investment policy is distinguished from directions as to the purchase or sale of a specific investment at a specific time or as to voting specific plan proxies.
In plans where investment management responsibility is delegated to one or more investment managers appointed by the named fiduciary pursuant to ERISA § 402(c)(3), inherent in the authority to appoint an investment manager, the named fiduciary responsible for appointment of investment managers has the authority to condition the appointment on acceptance of a statement of investment policy. Thus, such a named fiduciary may expressly require, as a condition of the investment management agreement, that an investment manager comply with the terms of a statement of investment policy which sets forth guidelines concerning investments and investment courses of action which the investment manager is authorized or is not authorized to make. Such investment policy may include a policy or guidelines on the voting of proxies on shares of stock for which the investment manager is responsible. In the absence of such an express requirement to comply with an investment policy, the authority to manage the plan assets placed under the control of the investment manager would lie exclusively with the investment manager. Although a trustee may be subject to the directions of a named fiduciary pursuant to ERISA § 403(a)(1), an investment manager who has authority to make investment decisions, including proxy voting decisions, would never be relieved of its fiduciary responsibility if it followed directions as to specific investment decisions from the named fiduciary or any other person.
Statements of investment policy issued by a named fiduciary authorized to appoint investment managers would be part of the "documents and instruments governing the plan" within the meaning of ERISA § 404(a)(1)(D). An investment manager to whom such investment policy applies would be required to comply with such policy, pursuant to ERISA § 404(a)(1)(D) insofar as the policy directives or guidelines are consistent with titles I and IV of ERISA. Therefore, if, for example, compliance with the guidelines in a given instance would be imprudent then the investment manager's failure to follow the guidelines would not violate ERISA § 404(a)(1)(D). Moreover, ERISA § 404(a)(1)(D) does not shield the investment manager from liability for imprudent actions taken in compliance with a statement of investment policy.
The plan document or trust agreement may expressly provide a statement of investment policy to guide the trustee or may authorize a named fiduciary to issue a statement of investment policy applicable to a trustee. Where a plan trustee is subject to an investment policy, the trustee's duty to comply with such investment policy would also be analyzed under ERISA § 404(a)(1)(D). Thus, the trustee would be required to comply with the statement of investment policy unless, for example, it would be imprudent to do so in a given instance.
Maintenance of a statement of investment policy by a named fiduciary does not relieve the named fiduciary of its obligations under ERISA § 404(a) with respect to the appointment and monitoring of an investment manager or trustee. In this regard, the named fiduciary appointing an investment manager must periodically monitor the investment manager's activities with respect to management of the plan assets. Moreover, compliance with ERISA § 404(a)(1)(B) would require maintenance of proper documentation of the activities of the investment manager and of the named fiduciary of the plan in monitoring the activities of the investment manager. In addition, in the view of the Department, a named fiduciary's determination of the terms of a statement of investment policy is an exercise of fiduciary responsibility and, as such, statements may need to take into account factors such as the plan's funding policy and its liquidity needs as well as issues of prudence, diversification and other fiduciary requirements of ERISA.
An investment manager of a pooled investment vehicle that holds assets of more than one employee benefit plan may be subject to a proxy voting policy of one plan that conflicts with the proxy voting policy of another plan. Compliance with ERISA § 404(a)(1)(D) would require such investment manager to reconcile, insofar as possible, the conflicting policies (assuming compliance with each policy would be consistent with ERISA § 404(a)(1)(D)) and, if necessary and to the extent permitted by applicable law, vote the relevant proxies to reflect such policies in proportion to each plan's interest in the pooled investment vehicle. If, however, the investment manager determines that compliance with conflicting voting policies would violate ERISA § 404(a)(1)(D) in a particular instance, for example, by being imprudent or not solely in the interest of plan participants, the investment manager would be required to ignore the voting policy that would violate ERISA § 404(a)(1)(D) in that instance. Such an investment manager may, however, require participating investors to accept the investment manager's own investment policy statement, including any statement of proxy voting policy, before they are allowed to invest. As with investment policies originating from named fiduciaries, a policy initiated by an investment manager and adopted by the participating plans would be regarded as an instrument governing the participating plans, and the investment manager's compliance with such a policy would be governed by ERISA § 404(a)(1)(D).
Interpretive Bulletin 94-3
December 28, 1994 (59 FR 66735)
Agency: Pension and Welfare Benefits Administration, Department of Labor
Action: Interpretive Bulletin.
Summary: This document provides guidance on in-kind contributions to employee benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA) and plans under section 4975 of the Internal Revenue Code (the Code). The Supreme Court addressed certain in-kind contributions to defined benefit pensions plans in Commissioner of Internal Revenue v. Keystone Consolidated Industries, Inc., U.S. 113 S. Ct. 2006 (1993). The Court in Keystone held that an employer's contribution of unencumbered real properties to a tax-qualified defined benefit pension plan in satisfaction of the employer's funding obligation is a "sale or exchange" prohibited by section 4975(c)(1)(A) of the Code. Section 406(a)(1)(A) of ERISA is a parallel provision to section 4975(c)(1)(A) of the Code but applies to a different group of plans. This document sets forth the Department's view that in-kind contributions (for example, contributions of any property other than cash) that reduce an obligation to the plan constitute prohibited transactions under section 4975(c)(1)(A) of the Code and section 406(a)(1)(A) of ERISA.
Effective Date: The guidance announced in this bulletin is effective January 1, 1975.
Relating to In-Kind Contributions to Employee Benefit Plans.
In Commissioner of Internal Revenue v. Keystone Consolidated Industries, Inc., U.S. , 113 S. Ct. 2006 (1993), the Supreme Court held that an employer's contribution of unencumbered real property to a tax-qualified defined benefit pension plan was a sale or exchange prohibited under section 4975 of the Code where the stated fair market value of the property was credited against the employer's obligation to the defined benefit pension plan. The parties stipulated that the property was contributed to the plan free of encumbrances and the stated fair market value of the property was not challenged. 113 S. Ct. at 2009. In reaching its holding the Court construed section 4975(f)(3) of the Code (and therefore section 406(c) of ERISA), regarding transfers of encumbered property, not as a limitation but rather as extending the reach of section 4975(c)(1)(A) of the Code (and thus section 406(a)(1)(A) of ERISA) to include contributions of encumbered property that do not satisfy funding obligations. Id. at 2013. Accordingly, the Court concluded that the contribution of unencumbered property was prohibited under section 4975(c)(1)(A) of the Code (and thus section 406(a)(1)(A) of ERISA) as "at least both an indirect type of sale and a form of exchange, since the property is exchanged for diminution of the employer's funding obligation." 113 S. Ct. at 2012.
Conversely, a transfer of unencumbered property to a welfare benefit plan that does not relieve the sponsor or employer of any present or future obligation to make a contribution that is measured in terms of cash amounts would not constitute a prohibited transaction under
Interpretive Bulletin 96-1
29 C.F.R. Part 2509.96-1
June 11, 1996 (61 FR 29586)
Agency: Pension and Welfare Benefits Administration, Labor.
Action: Interpretive bulletin.
Summary: This interpretive bulletin sets forth the views of the Department of Labor (the Department) concerning the circumstances under which the provision of investment-related information to participants and beneficiaries in participant-directed individual account pension plans will not constitute the rendering of "investment advice" under the Employee Retirement Income Security Act of 1974, as amended (ERISA). This guidance is intended to assist plan sponsors, service providers, participants and beneficiaries in determining when activities designed to educate and assist participants and beneficiaries in making informed investment decisions will not cause persons engaged in such activities to become fiduciaries with respect to a plan by virtue of providing "investment advice" to plan participants and beneficiaries for a fee or other compensation.
Effective Date: January 1, 1975.
For further information contact:
Bette J. Briggs or Teresa L. Turyn, Pension and Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution Ave. N.W. Room N-5669, Washington, DC 20210, telephone (202) 219-8671, or Paul D. Mannina, Plan Benefits Security Division, Office of the Solicitor, U.S. Department of Labor, Washington, DC 20210, telephone (202) 219-4592. These are not toll-free numbers.
Supplementary Information: In order to provide a concise and ready reference to its interpretations of ERISA, the Department publishes its interpretive bulletins in the Rules and Regulations section of the Federal Register. Published in this issue of the Federal Register is ERISA Interpretive Bulletin 96-1, which interprets section 3(21)(A)(ii), 29 USC 1002(21)(A)(ii), and the Department's regulation issued thereunder at 29 C.F.R. 2510.3-21(c). The Department is publishing this interpretive bulletin because it believes there is a need to clarify the circumstances under which the provision of investment-related information to participants and beneficiaries will not give rise to fiduciary status under ERISA section 3(21)(A)(ii). (Sec. 505, Pub. L. 93-406, 88 Stat. 894 (29 USC 1135).)
With the growth of participant-directed individual account pension plans, more employees are directing the investment of their pension plan assets and, thereby, assuming more responsibility for ensuring the adequacy of their retirement income.* At the same time, there has been an increasing concern on the part of the Department, employers and others that many participants may not have a sufficient understanding of investment principles and strategies to make their own informed investment decisions. It has been represented to the Department that, while a number of employers sponsoring participant-directed individual account pension plans have instituted programs intended to educate their employees about investment principles, financial planning and retirement, many employers have not offered programs or offered only limited programs due to uncertainty regarding the extent to which the provision of investment-related information may be considered the rendering of "investment advice" under section 3(21)(A)(ii) of ERISA, resulting in fiduciary responsibility and potential liability in connection with participant-directed investments. Although section 404(c) of ERISA, 29 USC 1104(c), and the Department's regulations, at 29 C.F.R. 2550.404c-1, provide limited relief from liability for fiduciaries of pension plans that permit a participant or beneficiary to exercise control over the assets in his or her individual account, there remains a need for employers and others who provide investment information with respect to pension plan assets to know what standards apply in determining whether an education activity may give rise to fiduciary status.
In view of the important role that investment education can play in assisting participants and beneficiaries in making informed investment and retirement-related decisions and the uncertainty relating to the fiduciary implications of providing investment-related information to participants and beneficiaries, the Department is clarifying, herein, the application of ERISA's definition of the term "fiduciary with respect to a plan" in section 3(21)(A)(ii) to the provision of investment-related information to participants and beneficiaries.
Interpretive Bulletin 96-1 identifies categories of information and materials regarding participant-directed individual account pension plans that do not, in the view of the Department, constitute "investment advice" under the definition of "fiduciary" in ERISA section 3(21)(A)(ii) and the corresponding regulation at 29 C.F.R. 2510.3-21(c)(1). The interpretive bulletin points out, in effect, a series of graduated safe harbors under ERISA for plan sponsors and service providers who provide participants and beneficiaries with four increasingly specific categories of investment information and materials -- plan information, general financial and investment information, asset allocation models and interactive investment materials -- as described in paragraph (d) of IB 96-1.
Comments on the Interpretive Bulletin
Interpretive Bulletin 96-1 was developed following extensive review of educational materials currently being provided by plan sponsors and service providers to participants. To further ensure that the guidance provided would be helpful, and would promote increased and improved participant education efforts, the Department also released an exposure draft of the interpretive bulletin for public comment. The response to the exposure draft was overwhelmingly positive. Both plan sponsor and service provider representatives unequivocally agreed that the guidance as drafted would strengthen participant investment education, and urged the Department to proceed as expeditiously as possible to adopt the interpretive bulletin. The commenters also suggested various technical and clarifying changes which, as discussed below, have been included in the interpretive bulletin.
Identifying Specific Investment Alternatives in Model Asset Allocations
The most frequent comment on the exposure draft concerned the safe harbor provision in paragraphs (d)(3) (asset allocation models) and (d)(4) (interactive investment materials) that if a model asset allocation identifies or matches any specific investment alternative available under the plan with a generic asset class, then all investment alternatives under the plan with similar risk and return characteristics must be similarly identified or matched. The commenters were concerned that in plans with investment alternatives offered by multiple service providers it would be difficult, and possibly inappropriate, for one service provider to identify and describe a competitor's products.
The requirement to identify other investment alternatives within an asset class was intended to address the concern that a service provider could effectively steer participants to a specific investment alternative by identifying only one particular fund in connection with an asset allocation model. Where it is possible to identify other investment alternatives within an asset class, the Department encourages service providers to do so. In response to the comments, however, safe harbors (d)(3) and (d)(4) have been revised to provide that, where an asset allocation model identifies any specific investment alternative available under the plan, an accompanying statement must indicate that other investment alternatives having similar risk and return characteristics may be available under the plan, and must identify where information on those investment alternatives may be obtained.
The Fiduciary Safe Harbors and Section 404(c)
Several commenters requested clarification of the statement in the exposure draft that issues relating to the circumstances under which information provided to participants and beneficiaries may affect their ability to exercise independent control for purposes of 404(c) are outside the scope of the IB. The commenters were concerned that activities which come within one of the safe harbors for participant education may nevertheless be viewed by the Department as compromising a participant's or beneficiary's ability to exercise independent control under section 404(c).
Whether a participant or beneficiary has exercised independent control over the assets in his or her individual account pursuant to section 404(c) is necessarily a factual inquiry. In general, however, the types of educational programs described in the safe harbors do not, in the view of the Department, raise issues under section 404(c). Accordingly, footnote 2 of IB 96-1 makes clear that the provision of investment-related information and materials to participants and beneficiaries in accordance with paragraph (d) of the IB will not, in and of itself, affect the availability of relief from the fiduciary responsibility provisions of ERISA that is provided by section 404(c).
Applying Asset Allocations to Individual Participants and Beneficiaries
A number of commenters asked the Department to clarify the requirement to provide a statement that individual participants and beneficiaries should consider their other assets, income or investments (outside of the plan) when applying an asset allocation model or using interactive investment materials. The commenters pointed out that, in many instances, interactive models or materials already take into account an individual's other assets. Accordingly, they requested clarification that such models or materials come within the safe harbor in paragraph (d)(4). Commenters were also concerned that given the rationale for the safe harbor in paragraph (d)(4) -- i.e. that interactive investment models or materials enable participants and beneficiaries independently to design and assess multiple asset allocation models -- the Department may have intended to exclude from the safe harbors situations in which service providers assist individual participants or beneficiaries to develop possible asset allocation models based upon their personal financial information.
The provisions of the safe harbors are designed to ensure that participants and beneficiaries will have adequate information to enable them to make their own, informed asset allocation decisions. The Department has clarified that the safe harbor in paragraph (d)(4) for interactive investment materials would not be unavailable merely because the asset allocation models generated by the materials take into account a participant's or beneficiary's non-plan assets, income and investments. Nor does the Department consider that the safe harbor would be unavailable merely because participants and beneficiaries receive personal assistance in developing model asset allocations. In this regard, paragraph (d) of the IB states that providing the categories of information identified in paragraph (d) will not in and of itself constitute the rendering of "investment advice" irrespective of the form in which the materials are provided (e.g., whether on an individual or group basis, in writing or orally, or via video or computer software). The interpretive bulletin also makes clear that information and materials within each category may be furnished alone or combined with information and materials from other categories. For example, general financial and investment information on estimating future retirement income needs, determining investment time horizons and assessing risk tolerance, as described in paragraph (d)(2), may be combined with interactive investment materials described in paragraph (d)(4) in order to assist participants and beneficiaries to relate basic retirement planning concepts to their individual situations.
Generally Accepted Investment Theories
Several commenters requested clarification of the requirement that asset allocation models and interactive investment materials must be based on "generally accepted investment theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over defined periods of time." The Department included this requirement to assure that, for purposes of the safe harbors, any models or materials presented to participants or beneficiaries will be consistent with widely accepted principles of modern portfolio theory, recognizing the relationship between risk and return, the historic returns of different asset classes, and the importance of diversification.
Plan Sponsor or Fiduciary Endorsements of Service Providers
The commenters also requested clarification regarding the circumstances in which a plan sponsor or fiduciary may be viewed as having fiduciary responsibility by virtue of endorsing a third party who has been selected by a participant or beneficiary to provide participant education or investment advice. Commenters noted, for example, that a plan sponsor may wish merely to provide office space or make computer terminals available for use by a service provider that has been selected by a participant or beneficiary to provide investment education using interactive materials. Whether a plan sponsor or fiduciary has effectively endorsed or made an arrangement with a particular service provider is an inherently factual inquiry which depends upon all the relevant facts and circumstances. It is the Department's view, however, that a uniformly applied policy of providing office space or computer terminals for use by participants or beneficiaries who have independently selected a service provider to provide investment education would not, in and of itself, constitute an endorsement of or arrangement with the service provider for purposes of the IB.
Participation Rates, Contribution Levels and Pre-retirement Withdrawals
With the objective of distinguishing between investment education and investment advice, IB 96-1 focuses primarily on educational activities relating to investment decision-making. However, as suggested in a recent study by the Employee Benefits Research Institute (EBRI), which was commissioned by the Department of Labor, plan participants also need to be informed about the impact on retirement savings of pre-retirement withdrawals and other fundamental principles regarding plan participation and contribution levels. According to the EBRI study, the impact of pre-retirement withdrawals on retirement income is one of the least often provided topics and could have serious consequences for the adequacy of employees' retirement income. The Department, therefore, encourages educational service providers to emphasize that participants should: (1) participate in available plans as soon as they are eligible; (2) make the maximum contribution possible to the plan; and(3) if they change employment, refrain from withdrawing their retirement savings, and opt instead to directly transfer or roll over their plan account into an IRA or other retirement vehicle. Such information relating to plan participation is specifically encompassed within the safe harbor in paragraph (d)(1) of IB 96-1.
Application of the Investment Advisers Act of 1940
Employer sponsors of participant-directed individual account pension plans that provide investment-related information to employees who are participants in those plans have also raised questions regarding their status under the Investment Advisers Act of 1940, 15 USC 80b-1 et seq., ("Advisers Act"). In this regard, the staff of the Division of Investment Management of the Securities and Exchange Commission (SEC) has advised the Department of Labor that, generally, employers who provide their employees with investment information including, but not limited to, the type described in paragraph (d) of IB 96-1 would not be subject to registration or regulation under the Advisers Act. This position applies only to employers who provide such information, and not to third-party service providers, whose status under the Adviser's Act must be determined independently. See Letters from Jack W. Murphy, Associate Director (Chief Counsel), Division of Investment Management, SEC, to Olena Berg, Assistant Secretary, Pension and Welfare Benefit Administration, U.S. Department of Labor, dated February 22, 1996, and December 5, 1995. Persons who have questions regarding this issue are directed to contact the Office of the Chief Counsel, Division of Investment Management, at (202) 942-0660. This is not a toll free number.
With both an increase in the number of participant-directed individual account plans and the number of investment options available to participants and beneficiaries under such plans, there has been an increasing recognition of the importance of providing participants and beneficiaries, whose investment decisions will directly affect their income at retirement, with information designed to assist them in making investment and retirement-related decisions appropriate to their particular situations. Concerns have been raised, however, that the provision of such information may in some situations be viewed as rendering "investment advice for a fee or other compensation," within the meaning of ERISA section 3(21)(A)(ii), thereby giving rise to fiduciary status and potential liability under ERISA for investment decisions of plan participants and beneficiaries.
In response to these concerns, the Department of Labor is clarifying herein the applicability of ERISA section 3(21)(A)(ii) and 29 C.F.R. 2510.3-21(c) to the provision of investment-related educational information to participants and beneficiaries in participant directed individual account plans.2 In providing this clarification, the Department does not address the "fee or other compensation, direct or indirect," which is a necessary element of fiduciary status under ERISA section 3(21)(A)(ii).3
Applying 29 C.F.R. 2510.3-21(c) in the context of providing investment- related information to participants and beneficiaries of participant-directed individual account pension plans, a person will be considered to be rendering "investment advice," within the meaning of ERISA section 3(21)(A)(ii), to a participant or beneficiary only if: (i) the person renders advice to the participant or beneficiary as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property (2510.3-21(c)(1)(i); and (ii) the person, either directly or indirectly, (A) has discretionary authority or control with respect to purchasing or selling securities or other property for the participant or beneficiary (2510.3-21(c)(1)(ii)(A)), or (B) renders the advice on a regular basis to the participant or beneficiary, pursuant to a mutual agreement, arrangement or understanding (written or otherwise) with the participant or beneficiary that the advice will serve as a primary basis for the participant's or beneficiary's investment decisions with respect to plan assets and that such person will render individualized advice based on the particular needs of the participant or beneficiary (2510.3-21(c)(1)(ii)(B)).4
Whether the provision of particular investment-related information or materials to a participant or beneficiary constitutes the rendering of "investment advice," within the meaning of 29 C.F.R. 2510.3-21(c)(1), generally can be determined only by reference to the facts and circumstances of the particular case with respect to the individual plan participant or beneficiary. To facilitate such determinations, however, the Department of Labor has identified, in paragraph (d), below, examples of investment-related information and materials which if provided to plan participants and beneficiaries would not, in the view of the Department, result in the rendering of "investment advice" under ERISA section 3(21)(A)(ii) and 29 C.F.R. 2510.3- 21(c).
The information and materials described above relate to the plan and plan participation, without reference to the appropriateness of any individual investment option for a particular participant or beneficiary under the plan. The information, therefore, does not contain either "advice" or "recommendations" within the meaning of 29 C.F.R. 2510.3-21(c)(1)(i). Accordingly, the furnishing of such information would not constitute the rendering of "investment advice" for purposes of section 3(21)(A)(ii) of ERISA.
The information and materials described above are general financial and investment information that have no direct relationship to investment alternatives available to participants and beneficiaries under a plan or to individual participants or beneficiaries. The furnishing of such information, therefore, would not constitute rendering "advice" or making "recommendations" to a participant or beneficiary within the meaning of 29 C.F.R. 2510.3-21(c)(1)(i). Accordingly, the furnishing of such information would not constitute the rendering of "investment advice" for purposes of section 3(21)(A)(ii) of ERISA.
Because the information and materials described above would enable a participant or beneficiary to assess the relevance of an asset allocation model to his or her individual situation, the furnishing of such information would not constitute a "recommendation" within the meaning of 29 C.F.R. 2510.3-21(c)(1)(i) and, accordingly, would not constitute "investment advice" for purposes of section 3(21)(A)(ii) of ERISA. This result would not, in the view of the Department, be affected by the fact that a plan offers only one investment alternative in a particular asset class identified in an asset allocation model.
Signed at Washington, DC, this 30th day of May, 1996.
Pension and Welfare, Benefits Administration
U.S. Department of Labor.
- Footnotes -