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Mr. William A. Schmidt
Mr. Eric Berger
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW, 2nd Floor
Washington, DC 20036-1800
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2001-09A
ERISA Sec. 406(b)
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Dear Messrs. Schmidt and Berger: |
This is in response to your application, on
behalf of SunAmerica Retirement Markets, Inc. (SunAmerica), for an
exemption from the prohibited transaction restrictions of section
406 of the Employee Retirement Income Security Act of 1974, as
amended (ERISA), with respect to a program (the Program) under
which SunAmerica would render certain discretionary and
nondiscretionary asset allocation services to participants in ERISA-covered
plans (Plans). On the basis of the facts and representations
contained in your submission, it is the view of the Department
that, for the reasons discussed below, the transactions with
respect to which you have requested exemptive relief would not, to
the extent executed in a manner consistent with such facts and
representations, violate the provisions of section 406(b) of ERISA.
Accordingly, we have determined that the appropriate response to
your request is an advisory opinion, rather than an exemption under
ERISA section 408(a).(1) |
Your submission contains the following facts and
representations. SunAmerica is an indirectly wholly owned
subsidiary of SunAmerica Inc., and is one of a group of companies
wholly owned by SunAmerica, Inc. that provide a broad range of
financial services. SunAmerica’s affiliate, SunAmerica Asset
Management Corp., is a registered investment adviser under the
Investment Advisers Act of 1940. SunAmerica intends to offer the
Program to individual account plans described in section 3(34) of
ERISA. It is anticipated that virtually all of these Plans will be
designed or administered in a manner intended to comply with the
provisions of section 404(c) of ERISA.(2)
Under the Program, asset allocation services may be rendered to
Plan participants(3) either
through the “Discretionary Asset Allocation Service” or the
“Recommended Asset Allocation Service” (collectively, Services;
singly, Service). Through the Discretionary Asset Allocation
Service, a specific Model Asset Allocation Portfolio will be
implemented automatically with respect to a participant’s account
(Account). Through the Recommended Asset Allocation Service, a
specific Model Asset Allocation Portfolio will be recommended to a
participant for investment of his or her Account and the
participant then may choose to implement the advice, or to
disregard the recommendation and invest in a manner that does not
conform to the Model Asset Allocation Portfolios.(4)
The Plan fiduciary who causes a Plan to participate in the Program
will select the Service (or Services) that will be available to
participants and the manner by which participants will authorize
such Service (or Services). Model Asset Allocation Portfolios will
be based solely on the investment alternatives available under the
Plan, which your application refers to as “Core Investments,”
but which we refer to herein as “Designated Investments.”(5)
In this regard, it is anticipated that the Plans will offer,
exclusively or in addition to other vehicles, collective investment
vehicles to which SunAmerica or an affiliate of SunAmerica provides
investment advisory services (SunAmerica Funds).(6) |
According to your submission, while SunAmerica
will be making the Program, as well as other services, available to
Plans, the Model Asset Allocation Portfolios offered under the
Program will, in fact, be the product of a computer program
applying a methodology developed, maintained and overseen by a
financial expert who is independent of SunAmerica (the Financial
Expert). The Model Asset Allocation Portfolio produced under the
Program with respect to a particular participant, therefore, will
reflect the application of the methodologies developed by the
Financial Expert to the Designated Investments, taking into account
individual participant data, as provided by the participant, Plan
sponsor or recordkeeper. |
You represent that, with respect to a Plan’s
initial participation in the Program, a Plan fiduciary (i.e., a
fiduciary independent of SunAmerica and its affiliates) will be
provided detailed information concerning, among other things, the
Program and the role of the Financial Expert in the development of
the Model Asset Allocation Portfolios under the Program. In
addition, the Plan fiduciary will be provided, on an on-going
basis, a number of disclosures concerning the Program and
Designated Investments under the Plan, including information
pertaining to performance and rates of returns on Designated
Investments, expenses and fees of SunAmerica Funds that are
Designated Investments, and any proposed increases in investment
advisory or other fees charged under a SunAmerica Fund. |
You represent that, with respect to the
development of the Model Asset Allocation Portfolios, the Financial
Expert, using its own methodologies, will construct strategic
“asset class” level portfolios. Using generally accepted
principles of Modern Portfolio Theory, the Financial Expert will
evaluate and determine its strategic asset class level portfolio
recommendations. The Financial Expert then will construct each
Model Asset Allocation Portfolio by combining Designated
Investments so that the total asset class exposures of those
Designated Investments equals the desired strategic asset class
portfolio weight.(7) The Model
Asset Allocation Portfolios will have different risk and return
characteristics. In order for these methodologies to be employed,
the Designated Investments of a participating Plan must provide a
minimum exposure to a certain number of asset classes. SunAmerica
will inform the Plan fiduciary who causes a Plan to participate in
the Program of the asset classes that must be available for
operation of the Program,(8)
and will inform the Plan fiduciary whether this requirement has
been satisfied, as solely determined by the Financial Expert, with
respect to a particular selection of an investment alternative. |
SunAmerica may assist the Financial Expert by
providing certain background information for the development of the
Model Asset Allocation Portfolios. Specifically, SunAmerica may
supply the Financial Expert with algorithms, studies, analytics,
research, models, papers and any other relevant materials. The
Financial Expert also may seek the assistance of other entities in
developing the Model Asset Allocation Portfolios. You represent
that in all cases, the Financial Expert retains the sole control
and discretion for the development and maintenance of the Model
Asset Allocation Portfolios. |
With regard to the computer programs utilized by
the Financial Expert to select the specific Model Asset Allocation
Portfolio provided to a participant, you represent that any
programmers who are retained to formulate those programs will have
no affiliation with SunAmerica, and that neither SunAmerica nor any
of its affiliates will have any discretion regarding the output of
such programs. You further represent that these computer programs
require an input of minimum participant data that will be
determined by the Financial Expert. The Financial Expert also will
create a worksheet (the Worksheet) for gathering information from
individual participants. The Worksheet will consist of a series of
questions designed primarily to assess the participant’s
retirement needs, and will provide the participant an opportunity
to designate specific investments other than Designated
Investments, or to place constraints on investments in and among
Designated Investments, if available under the Plan. Also, with
respect to the Discretionary Asset Allocation Service, subsequent
to initial participation in the Program, at least once each
calendar quarter, a “Facilitator” will contact each participant
to whom services are provided to obtain any new or different
information requested on the Worksheet. This information may lead
the Financial Expert to implement a new Model Asset Allocation
Portfolio for the participant. The Facilitators will be employees
of SunAmerica, independent contractors of SunAmerica’s
affiliates, or independent contractors or employees of
broker-dealers not affiliated with SunAmerica. Facilitators will
not provide services to participants who receive the Recommended
Asset Allocation Service, and will not choose or recommend a Model
Asset Allocation Portfolio in connection with the Discretionary
Asset Allocation Service. |
The Model Asset Allocation Portfolios (or any
other Asset Allocation Portfolio) implemented will be reviewed
regularly and “rebalanced.” You explain that participant
Account or Asset Allocation Portfolio rebalancing is the process of
moving the assets in an Account or Asset Allocation Portfolio asset
class exposures toward its strategic target. This process seeks to
reduce the relative performance risk associated with moving the
asset class exposures away from what was intended in the strategic
asset allocation. You represent that the rebalancing procedures
will not involve any discretion on the part of SunAmerica or its
affiliates, and that the Financial Expert will develop a mechanical
formula to rebalance the relative value of the assets in each
Account on a predetermined basis. |
With regard to amounts paid by a Plan under the
Program, you represent that SunAmerica will receive a fixed
percentage of assets of the Plan invested in the Designated
Investments up to 100 basis points (the Program Fee). In addition,
SunAmerica may receive reimbursements, not to exceed a fixed
percentage of Plan assets invested in the Designated Investments up
to 25 basis points, for Facilitator fees and “direct expenses”
within the meaning of 29 C.F.R. section 2550.408c-2 in connection
with the operation of the Program paid by SunAmerica to
unaffiliated third persons for goods and services provided to
SunAmerica. SunAmerica, or any affiliate, will not be precluded
from receiving fees from the SunAmerica Funds. |
The Program Fee and any reimbursements payable
to SunAmerica, and any compensation payable to the Facilitators
under the Program, will not vary based on the asset allocations
made or recommended by the Financial Expert, except that the
Program Fee and any such reimbursements will be based on Designated
Investments only and will be reduced if an Account invests in other
than the Designated Investments. The compensation of the Financial
Expert in connection with the Program will not be affected by the
decisions made by the participants regarding investment of the
assets of their Accounts in accordance with any Asset Allocation
Portfolio. |
With regard to the Financial Expert, you
represent that the Financial Expert will receive compensation from
SunAmerica for its services as the Financial Expert. You represent
that fees to be paid by SunAmerica to the Financial Expert will not
exceed 5 percent of the Financial Expert’s gross income on an
annual basis. In addition you represent that the fees paid to the
Financial Expert by SunAmerica will not be affected by investments
made in accordance with any Asset Allocation Portfolio under the
Program. For example, neither the choice of the Financial Expert by
SunAmerica nor any decision to continue or terminate the
relationship shall be based on the fee income to SunAmerica that is
generated by the Financial Expert’s construction of the Model
Asset Allocation Portfolios. You further represent that there have
not been, nor will there be, any other relationships between
SunAmerica and the Financial Expert that would affect the ability
of the Financial Expert to act independent of SunAmerica and its
affiliates. Your submission indicates that by providing
discretionary asset management services and investment advice to
participants, SunAmerica may be acting as a fiduciary with respect
to the Plans. |
Your submission further indicates that
implementation of a Model Asset Allocation Portfolio, whether
automatically or at the direction of a participant, may result in
the receipt of increased investment advisory fees by SunAmerica or
an affiliated entity. At issue, therefore, is whether, under the
circumstances described in your submission, the receipt of such
fees resulting from the asset allocation services rendered to Plan
participants under the Program violates the prohibitions of section
406(b) of ERISA.
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Section 3(21)(A) of ERISA defines the term
fiduciary as a person with respect to a plan who (i) exercises any
discretionary authority or discretionary control respecting
management of such plan or exercises any authority or control
respecting management or disposition of its assets, (ii) renders
investment advice for a fee or other compensation, direct or
indirect, with respect to any moneys or other property of such
plan, or has any authority or responsibility to do so, or (iii) has
any discretionary authority or discretionary responsibility in the
administration of such plan. Regulation 29 C.F.R. section
2510.3-21(c)(1) states that, as a general matter, a person will be
deemed to be rendering investment advice within the meaning of
section 3(21)(A)(ii) if two criteria are met. First, pursuant to
regulation section 2510.3-21(c)(1)(i), the person must render
advice to the plan with regard to the value of securities or other
property, or make recommendations as to the advisability of
investing in, purchasing or selling securities or other property.
Second, pursuant to regulation section 2510.3-21(c)(1)(ii), a
person performing this type of service must either (A) have
discretionary authority or control with respect to purchasing or
selling securities or other property for the plan, or (B) render
such advice on a regular basis pursuant to a mutual agreement,
arrangement or understanding, written or otherwise, with the plan
that the plan or a fiduciary with respect to the plan will rely on
such advice as a primary basis for investment decisions with regard
to plan assets. Although the question of whether an entity is a
fiduciary by reason of providing services generally depends on the
particular facts and circumstances of each case, we are assuming,
for purposes of the discussion that follows in this advisory
opinion, that the totality of services provided by SunAmerica
causes it to be a fiduciary with respect to plans and participants
to which it renders services. In this regard, we note that section
404 of ERISA generally provides that fiduciaries shall discharge
their duties with respect to a plan prudently and solely in the
interest of the participants and beneficiaries. |
While section 406(a)(1)(C) of ERISA proscribes
the provision of services to a plan by a party in interest,
including a fiduciary, and section 406(a)(1)(D) prohibits the use
by or for the benefit of, a party in interest, of the assets of a
plan, section 408(b)(2) of ERISA provides a statutory exemption
from the prohibitions of section 406(a) of ERISA for contracting or
making reasonable arrangements 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. |
Section 406(b)(1) of ERISA provides that a
fiduciary with respect to a plan shall not deal with plan assets in
his or her own interests or for his or her own account. Section
406(b)(3) provides that a fiduciary with respect to a plan shall
not receive any consideration for his or her own personal account
from any party dealing with such plan in connection with a
transaction involving the assets of the plan. |
With respect to the prohibitions in section
406(b), regulation 29 C.F.R. section 2550.408b-2(a) indicates that
section 408(b)(2) of ERISA does not contain an exemption for an act
described in section 406(b) of ERISA (relating to conflicts of
interest on the part of fiduciaries) even if such act occurs in
connection with a provision of services which is exempt under
section 408(b)(2).(9) As
explained in regulation 29 C.F.R. section 2550.408b-2(e)(1), if a
fiduciary uses the authority, control, or responsibility which
makes it a fiduciary to cause the plan to enter into a transaction
involving the provision of services when such fiduciary has an
interest in the transaction which may affect the exercise of its
best judgment as a fiduciary, a transaction described in section
406(b)(1) would occur, and that transaction would be deemed to be a
separate transaction from the transaction involving the provision
of services and would not be exempted by section 408(b)(2).
Conversely, the regulation explains that a fiduciary does not
engage in an act described in section 406(b)(1) if the fiduciary
does not use any of the authority, control, or responsibility which
makes such person 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 such fiduciary has an
interest which may affect the exercise of such fiduciary’s best
judgment as a fiduciary. |
In general, the provision of investment advice
for a fee is a fiduciary act. On the basis of the foregoing, it is
the view of the Department that SunAmerica would be acting as a
fiduciary with respect to both the discretionary and
nondiscretionary asset allocation services provided to plans and
plan participants and, as such, would be subject to the fiduciary
responsibility provisions of ERISA, including sections 404 and 406.
In this regard, SunAmerica would be responsible for the prudent
selection and periodic monitoring of its investment advisory
services consistent with the requirements of ERISA section 404.(10) |
With respect to the prohibitions in section
406(b) of ERISA, it is the view of the Department that, based on
the facts and representations contained in your submission, the
individual investment decisions or recommendations (i.e., Asset
Allocation Portfolios) provided or implemented under the Program
would not be the result of SunAmerica’s exercise of authority,
control, or responsibility for purposes of section 406(b) and the
applicable regulations. This conclusion is premised on the
following facts. First, Plan fiduciaries responsible for selecting
the Program are fully informed about, and approve, the Program and
the nature of the services provided thereunder, including the role
of the Financial Expert. Second, the investment recommendations
provided to, or implemented on behalf of, participants are the
result of methodologies developed, maintained and overseen by a
party (the Financial Expert) that is independent of SunAmerica and
any of its affiliates.(11) The
Financial Expert (an independent party) retains sole control and
discretion over the development and maintenance of the
methodologies. Any computer programmers engaged to formulate the
computer programs used by the Financial Expert will have no
affiliation with SunAmerica. Recommendations provided to, or
implemented on behalf of, participants by SunAmerica will be based
solely on input of participant information into computer programs
utilizing methodologies and parameters provided by the Financial
Expert and neither SunAmerica, nor its affiliates, will be able to
change or affect the output of the computer programs. SunAmerica
will exercise no discretion over the communication to, or
implementation of, investment recommendations provided under the
Program. Third, the arrangement between SunAmerica and the
Financial Expert preserves the Financial Expert’s ability to
develop Model Asset Allocation Portfolios solely in the interests
of the plan participants and beneficiaries. Neither the Financial
Expert’s compensation from SunAmerica, nor any other aspect of
the arrangement between the Financial Expert and SunAmerica, is
related to the fee income that SunAmerica or its affiliates will
receive from investments made pursuant to the Portfolios. |
It is the view of the Department, therefore,
that, to the extent that SunAmerica follows the Program as
structured in relation to an investment of Plan assets in
SunAmerica Funds, there would not be a per se violation of section
406(b)(1) or (3) of ERISA solely as a result of SunAmerica’s, or
any affiliate’s, receipt of increased investment advisory fees
resulting from such investments. |
In view of this letter, the Department believes
that no further action is necessary with respect to your exemption
application. Accordingly, your exemption application is closed
without further action. This letter constitutes an advisory opinion
under ERISA
Procedure 76-1, 41 Fed. Reg. 36281 (Aug. 27, 1976).
Accordingly, this letter is issued subject to the provisions of
that procedure, including section 10 thereof, relating to the
effect of advisory opinions. |
Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations |
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Under Reorganization Plan No. 4
of 1978, 43 Fed. Reg. 47713 (Oct. 17, 1978), the authority of the
Secretary of the Treasury to issue rulings under section 4975 of
the Internal Revenue Code (Code) has been transferred, with
certain exceptions not here relevant, to the Secretary of Labor.
Therefore, the references in this letter to specific sections of
ERISA also refer to the corresponding sections of the Code.
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The Department expresses no
views herein, and no views should be implied, concerning the
application of ERISA section 404(c) to the Program or any
participating Plan or participant.
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The asset allocation services
under the Program also may be available to beneficiaries who,
under the terms of their Plan, have the power to direct the
investments in their account balances. For purposes of
convenience, we refer only to participants.
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You represent that the Program
and Services will impose no limit on the frequency with which a
participant may change his or her investment election. However,
there may be limits concerning such frequency under the terms of a
participating Plan.
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You explain that, with respect
to the Recommended Asset Allocation Services, under circumstances
where a participating Plan permits participant input such as
direction to invest in assets other than Designated Investments or
to place ceilings or floors on the percentages, or amounts, of
Designated or non-Designated Investments, the methodologies
followed by the Financial Expert, as described below, may result
in a portfolio, other than a Model Asset Allocation Portfolio,
that includes non-Designated Investments. You refer to such
portfolios, along with the Model Asset Allocation Portfolios,
generally as “Asset Allocation Portfolios.”
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As described below, an
independent Plan fiduciary will determine the investments that
will be available under the Plan.
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You explain that the assets
underlying the Designated Investments may fall into more than one
asset class, and that in constructing a Model Asset Allocation
Portfolio, the Financial Expert will employ a statistical method
to determine the asset class exposure to a participant of a
Designated Investment’s investment approach.
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You note that this process may
be completed in a summary manner where SunAmerica offers the
Program along with a range of SunAmerica Funds that will
constitute the Designated Investments. You also represent that
under no circumstances, except for Plans maintained by SunAmerica
and its affiliates, will SunAmerica select investment alternatives
to be made available under a Plan. This letter addresses only
participation by Plans that are not maintained by SunAmerica
and/or its affiliates.
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We express no opinion as to
whether the requirements of section 408(b)(2) of ERISA would be
satisfied with respect to the Program.
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The Department notes that, with
regard to the selection and monitoring of the Financial Expert and
SunAmerica’s investment advisory services, any consideration of
the effect of investment recommendations, or methodologies upon
which such recommendations are based, on the fees or other
compensation of SunAmerica or any of its affiliates, would, in the
view of the Department, be inconsistent with a fiduciary’s
obligations under section 404 of ERISA.
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Whether a party is
“independent” for purposes of the subject analysis will
generally involve a determination as to whether there exists a
financial interest (e.g., compensation, fees, etc.), ownership
interest, or other relationship, agreement or understanding that
would limit the ability of the party to carry out its
responsibility beyond the control, direction or influence of the
fiduciary. In this regard, we note there have been other contexts
in which the Department dealt with this issue. Under Prohibited
Transaction Class Exemption 84-14, relief from section 406(a) of
ERISA was provided for transactions between plans and parties in
interest if approved by a qualified professional asset manager (QPAM).
The party in interest could not be “related” to the QPAM -
meaning such party in interest (or person controlling, or
controlled by, the party in interest) could not own a five percent
or more interest in the QPAM; or the QPAM (or person controlling,
or controlled by, the QPAM) could not own a five percent or more
interest in the party in interest. Further, the plan with respect
to which the person was a party in interest could not represent
more than 20% of the assets that the QPAM had under management at
the time of the transaction.
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