PORTFOLIO

Qualified Plans — Investments (Portfolio 377)

Tax Management Portfolio No. 377, Qualified Plans — Investments, reviews the issues relating to specific types of investments that may be made by plans subject to Part 4 of Subtitle B of title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), or §4975 of the Internal Revenue Code of 1986, as amended (Code).  

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DESCRIPTION

Tax Management Portfolio No. 377, Qualified Plans — Investments, reviews the issues relating to specific types of investments that may be made by plans subject to Part 4 of Subtitle B of title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), or §4975 of the Internal Revenue Code of 1986, as amended (Code). The portfolio examines the legal concerns that plan fiduciaries may have when considering various types of investments and the ERISA guidance that governs those investments. The portfolio contains a general overview of the fiduciary responsibility provisions under ERISA and the prohibited transaction provisions of ERISA and Code §4975. For a more detailed discussion regarding fiduciary issues, see 365 T.M., ERISA — Fiduciary Responsibility and Prohibited Transactions.


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AUTHORS

BETH J. DICKSTEIN
Beth J. Dickstein, B.S., University of Illinois (1985, with highest honors); J.D., University of Pennsylvania Law School (1988, cum laude); Certified Public Accountant; member of the Tax Section of the American Bar Association.

ROBERT A. FERENCZ
Robert A. Ferencz, B.S., University of Illinois (1968); J.D., University of Michigan Law School (1973, magna cum laude, Order of the Coif, associate editor, Michigan Law Review); Certified Public Accountant; member of the Tax Section of the American Bar Association; member of the Illinois Bar.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Parties with Authority to Manage Plan Assets

A. Named Fiduciary

B. Investment Manager

C. Trustee

D. Other Persons With Authority Over Plan Assets

III. Permitted Investments Under ERISA

A. In General

1. Prudence

2. Diversification

3. Consistent with Plan Documents

B. Investments Not Permitted Under Prohibited Transaction Rules

1. Direct Prohibited Transactions

2. Self-Dealing Prohibited Transactions

3. Definition of Party in Interest

C. Investments in Collectibles Prohibited Under the Tax Code

IV. Identification of Plan Assets

A. In General

B. Instrument Evidencing Ownership in an Investment

C. Underlying Assets of Investment Vehicle

1. Indebtedness with No Substantial Equity Features

2. Issuers of Equity Investments Whose Underlying Assets Are Not Plan Assets

a. Publicly Offered Securities

b. Operating Companies

(1) Venture Capital Operating Company Requirements

(a) The Investment Test

(b) The Management Test

(c) Duration of VCOC Qualification

(2) Requirements to Qualify as a Real Estate Operating Company

(a) The Investment Test

(b) Ordinary Course of Business Test

c. Equity Participation by Benefit Plan Investors Satisfies the 25% Test

d. Governmental Mortgage Pools

e. Registered Investment Companies

3. Equity Investments with Underlying Assets That Are Always Plan Assets

a. Group Trusts, Bank Collective Investment Funds and Insurance Company Separate Accounts

b. Entity Owned by One Plan or Related Group of Plans

V. Location of Plan Assets

A. Indicia of Ownership Rules - In General

1. General Rule

2. Assets That May Be Held Outside the Jurisdiction of the U.S. District Courts

3. Assets Under the Control of Certain Fiduciaries

4. Assets Held in a Proper Location

B. Foreign Securities

C. Foreign Real Estate

VI. Delegation of Investment Responsibility

A. In-House Investment Committee

B. Investment Manager

1. Managed Account

2. Investment Policy or Investment Guidelines

3. Management Fees

4. Incentive Fees

VII. Investment Funds

Introductory Material

A. Mutual Funds

1. Underlying Assets Generally Are Not Plan Assets

2. Potential Prohibited Transactions Involving Purchase of Mutual Fund Shares

3. Applicable Exemptions

a. Part II of Class PTE 75-1

b. Class PTE 77-4

c. Class PTE 97-41

d. Class PTE 77-3

e. Class PTE 79-13

B. Group Trusts

1. Underlying Assets Generally Are Plan Assets

2. Issues Relating to the Acquisition of Investment in Group Trust

3. Operation of Group Trust That Is Not a Registered Investment Company

a. Fiduciary Duty and Prohibited Transaction Issues

b. Trust Requirement

c. ERISA Bond

d. Reporting Requirements

C. Bank Collective Investment Funds

1. Underlying Assets Generally Are Plan Assets

2. Issues Relating to the Acquisition of Investment in Collective Investment Fund

3. Operation of a CIF That Is Not a Registered Investment Company

a. Fiduciary Duty and Prohibited Transaction Issues

b. Trust Requirement

c. ERISA Bond

d. Reporting Requirements

D. Hedge Funds

1. In General

2. Issues Relating to the Acquisition and Holding of Hedge Fund Interests

a. Acquisition of Interests

b. Tax Issues

c. Indicia of Ownership

3. Operation of the Hedge Fund - Non-Plan Assets Funds

4. Operation of the Hedge Fund - Plan Assets Funds

a. In General

b. Manager Is an Investment Manager Under ERISA

c. Manager Is Not an Investment Manager Under ERISA

d. Payment of Fees to the Manager

e. Indicia of Ownership

f. Indemnification

g. Trust Requirement

h. ERISA Bond

i. Reporting Requirements

E. Private Equity Funds

1. In General

2. Issues Relating to the Acquisition and Holding of Private Equity Fund Interests

3. Operation of the Private Equity Fund - Non-Plan Assets Funds

4. Operation of the Private Equity Fund - Plan Assets Funds

a. In General

b. Payment of Fees

c. Trust Requirement, Indicia of Ownership and Reporting Requirements

F. Real Estate Funds

1. In General

2. Operation of the Real Estate Fund - Non-Plan Assets Funds

3. Operation of the Real Estate Fund - Plan Assets Funds

a. In General

b. Payment of Fees

c. Trust Requirement, Indicia of Ownership and Reporting Requirements

VIII. Insurance Investments

A. Guaranteed Investment Contracts

1. In General

2. DOL Information Letter

3. Judicial Precedent Relating to an Insurance Company's Status as Fiduciary

a. Market Value Adjustments

b. Annuity Purchase Rate Guarantees

4. Operating a General Account with Plan Assets

B. Separate Account Products

1. In General

2. Issues Relating to Acquisition of Investment in Separate Accounts

3. Operating a Separate Account with Plan Assets

4. Reporting Requirements

C. Insurer's Power to Amend Contract

IX. Asset-Backed and Mortgage-Backed Securities and Collateralized Debt Obligations

A. Asset-Backed/Mortgage-Backed Securities

1. Background

2. Debt

3. Equity

4. Class PTE 83-1

5. Special Underwriter Exemptions

a. Background

b. General Conditions of Underwriter Exemption

c. Senior Status and Ratings Requirement

d. Designated Transactions

e. Obligations Must be Fully Secured

f. Restricted Group

g. Reasonable Compensation

h. Plan Must be an Accredited Investor

i. Pre-Funding

j. Insolvency Protection

k. Swaps

l. Qualified Plan Investor

6. Class PTE 95-60 Applicable to ABS/MBS

7. Credit Card Receivables - Individual Exemptions

a. Background

b. General Conditions

B. CDOs

1. Background

2. Debt

3. Equity

a. Acquisition of CDO Certificate

b. Application of an Exception Under the Plan Asset Regulations

c. Operation of CDO Issuer as Plan Assets Entity

(1) Actively Managed Pool of Assets

(2) Static Pool of Assets

X. Other Types of Investments

A. Exchange-Traded Assets - Securities, Commodity Contracts, Futures Contracts and Options

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Exchange - Traded Assets

3. Statutory Exemption for Transactions Executed through an Electronic Communication Network

B. Principal Transactions Involving Securities

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Principal Transactions Involving Securities

3. Part II of Class PTE 75-1

C. Principal Transactions Involving Securities in Which Counterparty Is Not Regulated by U.S. Law

1. In General

2. Specific ERISA Prohibited Transaction Concerns Involving Foreign Entities

3. Individual Prohibited Transactions Involving Foreign Entities

4. Other ERISA Concerns Regarding Foreign Entities

D. Exchange-Traded Funds

1. In General

2. Specific ERISA Prohibited Transaction Concerns - Exchange-Traded Funds

E. Securities Lending

1. In General

2. Specific ERISA Concerns - Securities Lending

3. Class PTE 2006-16

a. Scope of Exemption

b. Conditions Applicable to Loans to U.S. and Foreign Borrowers

c. Collateral Requirements

d. Conditions Applicable to Loans to Foreign Borrowers

e. Conditions Applicable to Payment of Compensation for Securities Lending Services

F. Buying Securities on Margin

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Buying on Margin

3. Part V of Class PTE 75-1

4. Unrelated Business Taxable Income

G. Short Sales

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Short Sales

3. Part V of Class PTE 75-1

4. Individual Exemptions Applicable to Entities Regulated Under Foreign Law

5. Unrelated Business Taxable Income

H. Repurchase Agreements

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Repurchase Agreements

3. Class PTE 81-8

I. Reverse Repurchase Agreements

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Reverse Repurchase Agreements

J. Banker's Acceptances

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Banker's Acceptances

3. Class PTE 81-8

K. Commercial Paper

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Commercial Paper

3. Class PTE 81-8

L. Certificates of Deposit

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Certificates of Deposit

3. Class PTE 81-8

4. Statutory Exemption

M. Futures Contracts

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Futures Contracts

3. Other ERISA Concerns Regarding Future Contracts

N. Foreign Exchange Transactions

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Foreign Exchange Transactions

3. Statutory Exemption for Foreign Exchange Transactions

4. Class PTE 94-20

5. Class PTE 98-54

a. Income Conversion Items

b. De Minimis Purchase or Sale Transaction

c. Conditions for Exemption

d. Additional Requirements for Income Item Conversions

e. Additional Requirements for De Minimis Purchase and Sale Transactions

f. Definition of “Good Funds”

g. Additional Considerations

O. Swaps

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Swaps

3. International Swaps and Derivatives Association Contracts

P. PIPEs

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding PIPEs

Q. Exchange for Physical Transaction

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Exchange for Physical Transactions

XI. Special Considerations for Self-Directed Plans

XII. Investments in Employer Securities

Introductory Material

A. Definitions of Employer Securities and Qualifying Employer Securities

B. Special Rules Applicable to Qualifying Employer Securities

C. Qualifying Employer Securities Held By Defined Contribution Plans

1. In General

2. Former Employer Securities

D. Defined Benefit and Other Plans

E. Corporate Governance Issues Involving Employer Securities

XIII. Brokerage Issues

A. Prime Brokerage Arrangements

1. In General

2. Specific ERISA Prohibited Transaction Concerns Regarding Prime Brokerage Arrangements

a. In General

b. Custodial and Settlement Services, Record Keeping and Account Reporting

c. Securities Lending, Swap Transactions and Foreign Exchange Transactions

d. Use of Collateral by Prime Broker

(1) Application of Futures Analysis

(2) Application of Float Analysis

(3) Use of Class of Statutory Prohibited Transaction Exemption

B. Soft Dollars

1. In General

2. Specific DOL Guidance on Soft Dollars

C. Execution of Transactions by a Fiduciary or Its Affiliate

XIV. Cross-Trades

A. Background

B. Class Exemption for Cross-Trades

1. Definition of Index Fund

2. Definition of Index

3. Definition of Model-Driven Fund

4. Definition of Large Account

5. Specific Conditions

a. Executed at the Closing Price

b. Occurs as a Result of a Triggering Event

c. Timing of Trade Where Change Is Made in Model-Driven Fund

d. Allocation of Cross-Trade Opportunity

e. Limit on Manager Plan Assets

f. Types of Securities That May Be Cross-Traded

g. No Fees

h. Written Authorization

i. Required Statement to Be Furnished

j. Information to be Furnished

k. Annual Notification of Right to Terminate

l. Special Rules Relating to Large Accounts

C. Statutory Exemption

D. Cases Involving Cross-Trades


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Sample Investment Guidelines for § 401(k) Plan

Worksheet 2 Sample ERISA Disclosure for an Investment Fund that Complies with the 25% Test

Worksheet 3 Sample ERISA Disclosure for CDO Offering

Worksheet 4 Sample ERISA Provisions for an ISDA

Worksheet 5 PTE 75-1 - Exemptions from Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefits Plans and Certain Broker-Dealers, Reporting Dealers and Banks

Worksheet 6 PTE 84-14 - Plan Asset Transactions Determined by Independent Qualified Professional Asset Managers (QPAM)

Worksheet 7 PTE 90-1 - Transactions Involving Insurance Company Pooled Separate Accounts

Worksheet 8 PTE 91-38 - Transactions Involving Bank Collective Investment Funds

Worksheet 9 PTE 95-60 - Transactions Involving Insurance Company General Accounts

Worksheet 10 PTE 96-23 - Plan Asset Transactions Determined by In-House Asset Managers (IN-HAM)

Worksheet 11 PTE 2007-05 - Underwriters' Exemption

Worksheet 12 PTE 2000-47 - Exemption for Principal Transactions, Securities Lending and Extension of Credit with Foreign Affiliates of Goldman Sachs

Worksheet 13 DOL Adv. Op. 2008-01A - Request for Clarification of the Underwriter Exemption

Bibliography

OFFICIAL

Statutes:

Legislative History:

Treasury Rulings:

Department of Labor Advisory Opinions:

Department of Labor Opinions - Other

Department of Labor Information Letters:

Department of Labor Regulations:

ERISA Technical Releases:

Class PTEs:

Private Letter Rulings:

Individual PTEs:

Cases:

Miscellaneous:

UNOFFICIAL

Periodicals:

1997

1999

2003

2005