PORTFOLIO

ERISA — Fiduciary Responsibility and Prohibited Transactions (Portfolio 365)

Tax Management Portfolio No. 365-2nd, ERISA — Fiduciary Responsibility and Prohibited Transactions, reviews the principal issues arising under Part 4 of Title I of the Employee Retirement Income Security Act of 1974. The portfolio examines the issue of which activities related to a plan generate the status of “fiduciary” under ERISA. It discusses fiduciary responsibility under the Act — the duties to act prudently, with loyalty, consistently with governing plan documents and with a view to minimizing the risk of large losses by diversifying plan assets. The portfolio analyzes the prohibited transaction rules as well, discussing statutory, class, and administrative exemptions from ERISA's ban against dealings between plans and “parties in interest.” It also describes the remedies available under ERISA and considers procedural issues arising in litigation under ERISA.

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DESCRIPTION

Tax Management Portfolio No. 365-2nd, ERISA — Fiduciary Responsibility and Prohibited Transactions, reviews the principal issues arising under Part 4 of Title I of the Employee Retirement Income Security Act of 1974. The portfolio examines the issue of which activities related to a plan generate the status of “fiduciary” under ERISA. It discusses fiduciary responsibility under the Act — the duties to act prudently, with loyalty, consistently with governing plan documents and with a view to minimizing the risk of large losses by diversifying plan assets. The portfolio analyzes the prohibited transaction rules as well, discussing statutory, class, and administrative exemptions from ERISA's ban against dealings between plans and “parties in interest.” It also describes the remedies available under ERISA and considers procedural issues arising in litigation under ERISA.

The Worksheets contain Department of Labor (DOL) procedures used to apply for a prohibited transaction exemption or to solicit an advisory opinion from DOL and assessment of sanctions and penalties. They also contain certain major class exemptions and the procedures used by DOL to assess sanctions and penalties. The Worksheets include sundry materials from DOL explicating fiduciary responsibility, including investment duties and the propriety of “economically targeted investments.” From the IRS, the Worksheets gather certain examination guidelines and exhibits demonstrating the computation of excise taxes under the Code.


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AUTHORS

ED HORAHAN
Ed Horahan currently acts as of counsel to the Groom Law Group, Chartered, in Washington, D.C. A 1976 graduate of Yale Law School, he formerly served on the staff of the Securities and Exchange Commission and litigated ERISA cases while with the Solicitor's Office of the Department of Labor. In the private sector, he was a partner in the Washington offices of New York City law firms and the proprietor of his own law practice.

NELL HENNESSY
Nell Hennessy is an attorney and consultant, and President of ASA Fiduciary Counselors Inc., as well as Senior Vice President of ASA's Corporate Restructuring Practice in Washington, D.C., following her many years of service as Deputy Executive Director and Chief Negotiator for the Pension Benefit Guaranty Corporation. A 1978 law graduate of Catholic University and the recipient of a Masters degree in Taxation from Georgetown University, in private law practice, she was a partner with Willkie, Farr & Gallagher.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Coverage by ERISA Title I

III. Fiduciary Status Under ERISA

Introductory Material

A. Discretionary Authority or Control Over Management of Plan or Plan Assets

B. Rendering Investment Advice for a Fee

C. Discretionary Authority or Responsibility in Plan Administration

D. Scope of Fiduciary Activity

IV. Plan Assets Under ERISA

Introductory Material

A. Insurance Company Guaranteed Benefit Policies

B. Effect of Plan Assets

C. Plan Assets

1. General Rules

2. Exceptions

a. Publicly Offered Security and Investment Companies

b. Operating Companies

c. Venture Capital Operating Companies

d. Real Estate Operating Companies

e. Significant Equity Participation by Benefit Plan Investors-Look-Through Rule

f. Governmental Mortgage Pools

g. Transitional Rules

3. Participant Contributions

a. Retirement Plans

b. Welfare Plans

4. Demutualization Proceeds

5. Allocation of Plan Expenses Among Plan Participants

V. Elements of Plan Structure

A. Written Plan Document

B. Named Fiduciary

C. Plan Procedures

1. Funding

2. Plan Administration

3. Plan Amendments

4. Payments to and from the Plan

D. Establishment of a Trust

VI. Fiduciary Duties

A. In General

B. Prudence

1. Investment Duties

a. Economically Targeted Investments

b. Investment Policies and Proxy Voting

2. Selection and Monitoring of Service Providers

3. Participant-Directed Individual Account Plans

4. Purchase of Annuities for Terminating Plans

5. Settlement Proceeds

6. Plan Data Supplied by Nonfiduciary

C. Diversification

1. Diversification of Investments Made by Plans

2. Diversification for Individual Account Plans

D. Loyalty

E. In Accordance with Plan Documents

F. Co-Fiduciary Liability

G. Disclosure

H. Fee Reasonableness and Disclosure

VII. Limitations on Fiduciary Responsibility

A. Allocation or Delegation of Fiduciary Responsibilities

B. Participant-Directed Individual Account Plans

1. Regulations Implementing ERISA § 404(c)

a. Indicia and Scope of Participant Control

b. Mandatory Distributions and Involuntary Rollovers

c. Default Investment Arrangements

d. Change in Investment Options

2. Participant Investment Education

3. ERISA § 404(c) as Defense to Claim of Fiduciary Breach

VIII. Prohibited Transactions

A. Parties in Interest and Disqualified Persons

B. Party in Interest Transactions

C. Fiduciary Prohibited Transactions

D. Excise Taxes

E. Employer Securities and Employer Real Property

F. Statutory Exemptions

1. Loans to Participants: ERISA § 408(b)(1) and Code § 4975(d)(1)

2. Office Space and Necessary Services Provided by a Party in Interest: ERISA § 408(b)(2) and Code § 4975(d)(2)

3. Leveraged Employee Stock Ownership Plans (ESOPs): ERISA § 408(b)(3) and Code § 4975(d)(3)

4. Transactions with Banks and Similar Financial Institutions: ERISA § 408(b)(4), (6) and (8), and Code § 4975(d)(4), (6) and (8)

a. Bank Deposits

b. Ancillary Services

c. Common Trust Fund

5. Insurance Companies

6. Conversion of Securities

7. Fiduciary Benefits and Compensation

8. Transactions with Owner-Employees

9. Sales of Bank Stock Held by IRA in Connection with S Corporation Election

10. Investment Advice Tailored to Participants and Beneficiaries

11. Transactions with Service Providers for Adequate Consideration

12. Correction of Transactions Involving Securities

13. Block Trades

14. Transactions Made Through an Electronic Communications Network

15. Foreign Exchange Transactions

16. Cross Trading

17. Plan Asset Transfers to Retiree Health Accounts

G. Administrative Exemptions

H. Class Exemptions

1. Qualified Professional Asset Managers (QPAM)

2. Multiemployer Plans

3. Insurance Company Separate Accounts and Bank Collective Investment Funds

4. Investment Companies

5. Securities Broker-Dealers

6. Insurance Agents and Brokers and Pension Consultants

7. Securities Lending

8. Short-Term Investments

9. Residential Mortgage Financing

10. Mortgage Pool Investment Trusts

11. Customer Notes

12. IRAs and Keogh Plans

13. In-House Asset Managers (INHAM)

14. Sale of Individual Life Insurance Contracts and Annuities

15. Litigation Settlements with Parties in Interest

16. Holding REIT Interests by Trust REIT Individual Account Plan

17. Foreign Exchange Transactions

18. Voluntary Fiduciary Correction Program

19. Abandoned Individual Account Plan Terminations

20. Service Provider Contracts and Arrangements

21. Investment Advice for Self-Directed Defined Contribution Plans and IRAs

I. Individual Exemptions

IX. Remedies

A. Parties Plaintiff

B. Relief Against Fiduciaries

C. Relief Against Non-Fiduciaries

D. Contribution and Settlement Bars

E. Procedural Matters

F. Punitive and Extracontractual Damages

G. Attorney's Fees and Liquidated Damages

1. Generally

2. Delinquent Contributions

H. Penalty Provisions

I. Voluntary Fiduciary Correction Program

X. Exculpatory Provisions and Indemnification

XI. Preemption of State Law

XII. IRAs and Keogh Plans

XIII. Church and Governmental Plans

XIV. Bonding

A. General Rule

B. Nature of Bond

C. Coverage of the Bond

D. Amount of the Bond

E. Exceptions

F. Penalties

XV. Felons Prohibited from Holding Plan Positions


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Definition of Fiduciary - 29 CFR Section 2510.3–21

Worksheet 2 Investment Duties - 29 CFR Section 2550.404a–1

Worksheet 3 General Statutory Exemption for Services or Office Space - 29 CFR Section 2550.408b–2

Worksheet 3A Fiduciary Relief: Default Investment Alternatives for Participant-Directed Individual Account Plans - DOL Regs. § 2550.404c-5

Worksheet 3B Selection of Annuity Providers - Safe Harbor for Individual Account Plans - DOL Regs. § 2550.404a-4

Worksheet 4 Procedures for the Assessment of Civil Sanctions Under ERISA § 502(i) - DOL Regs. § 2570.1–.12, as amended

Worksheet 5 Procedures for Filing and Processing Prohibited Transaction Exemption Applications - DOL Regs. § 2570.30–.52, as amended

Worksheet 6 Procedures for the Assessment of Civil Penalties Under ERISA § 502(c)(2) - DOL Regs. § 2570.60–.71

Worksheet 7 Procedures for the Assessment of Civil Penalties Under ERISA § 502(l) - DOL Regs. § 2570.80–.88, as amended

Worksheet 7A Procedures for the Assessment of Civil Penalties Under ERISA § 502(c)(5) - DOL Regs. § 2570.90-.101, as amended

Worksheet 7B Procedures for the Assessment of Civil Penalties Under ERISA § 502(e)(6) - DOL Regs. § 2570.110-.121, as amended

Worksheet 7C Procedures for the Assessment of Civil Penalties Under ERISA § 502(c)(7) - DOL Regs. § 2570.130-.141, as amended

Worksheet 8 Procedures for ERISA Advisory Opinions - ERISA Proc. 76–1

Worksheet 9 Interpretive Bulletin Relating to Prohibited Transactions - DOL Regs. § 2509.75–2

Worksheet 10 Questions and Answers Relating to Fiduciary Responsibility - DOL Regs. § 2509.75-5

Worksheet 11 Questions and Answers Relating to Fiduciary Responsibility Under ERISA - 29 CFR Section 2509.75–8

Worksheet 12 Supplemental Guidance Relating to Fiduciary Responsibility in Considering Economically Targeted Investments - DOL Regs. § 2509.08–1

Worksheet 13 Interpretive Bulletin Relating to Exercise of Shareholder Rights and Written Statements of Investment Policy, Including Proxy Voting Policies or Guidelines - DOL Regs. § 2509.08-2

Worksheet 14 Interpretive Bulletin Relating to In-kind Contributions to Employee Benefit Plans - DOL Regs. § 2509.94–3

Worksheet 15 Plan Asset Transactions Determined by Independent Qualified Professional Asset Managers (QPAM) - PTE 84–14, as amended by 70 Fed. Reg. 49305 (8/23/05)

Worksheet 16 Certain Transactions Identified in the Voluntary Fiduciary Correction Program - PTE 2002-51

Worksheet 17 Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, Investment Companies and Investment Company Principal Underwriters - PTE 84-24, as Amended by 71 Fed. Reg. 5887 (2/3/06)

Worksheet 18 To Permit Employee Benefit Plans to Invest in Customer Notes of Employers - PTE 85–68

Worksheet 19 Class Exemption to Permit Certain Authorized Transactions Between Plans and Parties in Interest [Expedited Procedure for Certain Individual Prohibited Transaction Requests] - PTE 96–62

Worksheet 20 Internal Revenue Manual Employee Plans Technical Guidance Section 11 Prohibited Transactions

Worksheet 21 [Reserved]

Worksheet 22 ERISA Technical Release No. 86–1 - Statement on Policies Concerning Soft Dollar and Directed Commission Arrangements

Worksheet 23 ERISA Technical Release No. 92–1 - Revised Enforcement Policy with Respect to Welfare Plans with Participant Contributions

Worksheet 24 DOL Field Assistance Bulletin 2008-03 - Qualified Default Investment Alternatives

Worksheet 25 [Reserved]

Worksheet 26 DOL Advisory Opinion 2002-14A, Selection of Annuity Providers

Worksheet 27 DOL Voluntary Fiduciary Correction Program

Worksheet 28 DOL Delinquent Filer Voluntary Compliance Program

Worksheet 29 DOL Field Assistance Bulletin 2003-3 (5/19/03) – Allocation of Expenses in a Defined Contribution Plan

Bibliography

OFFICIAL

Statutes:

Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

General:

Articles:

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