[Federal Register: October 17, 2008 (Volume 73, Number 202)]
[Rules and Regulations]
[Page 61734-61736]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17oc08-10]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2509
RIN 1210-AB29
Interpretive Bulletin Relating to Investing in Economically
Targeted Investments
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Interpretive bulletin.
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SUMMARY: This document sets forth the views of the Department of Labor
concerning the legal standards imposed on fiduciaries of employee
benefit plans by sections 403 and 404 of Title I of the Employee
Retirement Income Security Act (ERISA) when considering investments in
``economically targeted investments.'' These guidelines affect
fiduciaries of employee benefit plans, including trustees, investment
managers and others responsible for the management of employee benefit
plan assets.
DATES: This interpretive bulletin is effective on October 17, 2008.
FOR FURTHER INFORMATION CONTACT: Office of Regulations and
Interpretations, Employee Benefits Security Administration, (202) 693-
8500. This is not a toll free number.
SUPPLEMENTARY INFORMATION: On June 23, 1994, the Department of Labor
(the Department) published Interpretive Bulletin Sec. 2509.94-1 (29
CFR 2509.94-1) addressing the limited circumstances under which
fiduciaries, consistent with the requirements of sections 404 and 404
of Title I of the Employee Retirement Income Security Act (ERISA), may,
in connection with investment decisions, take into account factors
other than the economic interests of the plan. The guidance provided in
this document, Interpretive Bulletin Sec. 2509.08-1, clarifies,
through explanation and examples, that fiduciary consideration of non-
economic factors should be rare and, when considered, should be
documented in a manner that demonstrates compliance with ERISA's
rigorous fiduciary standards. This guidance modifies and supersedes the
guidance provided in interpretive bulletin 94-1.
List of Subjects in 29 CFR Part 2509
Employee benefit plans, Pensions.
0
For the reasons set forth in the preamble, the Department is amending
Subchapter A, Part 2509 of Title 29 of
[[Page 61735]]
the Code of Federal Regulations as follows:
Subchapter A--General
PART 2509--INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974
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1. The authority citation for part 2509 continues to read as follows:
Authority: 29 U.S.C. 1135. Secretary of Labor's Order No. 1-
2003, 68 FR 5374 Feb. 3, 2003). Sections 2509.75-10 and 2509.75-2
are also issued under 29 U.S.C. 1052, 1053, 1054. Section 2509.75-5
is also issued under 29 U.S.C. 1002.
Sec. 2509.94-1 [Removed]
0
2. Part 2509 is amended by removing Sec. 2509.94-1.
0
3. Part 2509 is further amended by adding new Sec. 2509.08-1 to read
as follows:
Sec. 2509.08-1 Supplemental guidance relating to fiduciary
responsibility 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,'' that is,
investments selected for the economic benefits they create apart from
their investment return to the employee benefit plan. The guidance set
forth in this interpretive bulletin modifies and supersedes the
guidance set forth in interpretive bulletin 94-1 (29 CFR 2509.94-1).
ERISA requires 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 Act
specifically states, in relevant part, that:
``[A]ssets of a plan shall never inure to the benefit of
any employer and shall be held for the exclusive purposes of providing
benefits to participants in the plan and their beneficiaries.* * *''
\1\
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\1\ Sec. 403(c)(1), 29 U.S.C.A. 1103(c)(1).
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``[A] fiduciary shall discharge his duties with respect to
a plan solely in the interest of the participants and beneficiaries and
for the exclusive purpose of providing benefits to participants and
their beneficiaries.'' \2\
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\2\ Sec. 404(a)(1)(A)(i), 29 U.S.C.A. 1104(a)(1)(A)(i).
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ERISA's plain text thus establishes a clear rule that in the course
of discharging their duties, fiduciaries may never subordinate the
economic interests of the plan to unrelated objectives, and may not
select investments on the basis of any factor outside the economic
interest of the plan except in very limited circumstances enumerated
below.
With regard to investing plan assets, the Department has issued a
regulation, at 29 CFR 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 (1) the
fiduciary making an investment or engaging in an investment course of
action has given appropriate consideration to those facts and
circumstances that, given the scope of the fiduciary's investment
duties, the fiduciary knows or should know are relevant, and (2) the
fiduciary acts accordingly. This includes giving appropriate
consideration to the role that the investment or investment course of
action plays (in terms of 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.
ERISA's plain text does not permit fiduciaries to make investment
decisions on the basis of any factor other than the economic interest
of the plan. Situations may arise, however, in which two or more
investment alternatives are of equal economic value to a plan. The
Department has recognized in past guidance that under these limited
circumstances, fiduciaries can choose between the investment
alternatives on the basis of a factor other than the economic interest
of the plan. The Department has interpreted the statute to permit this
selection because (1) ERISA requires fiduciaries to invest plan assets
and to make choices between investment alternatives, (2) ERISA does not
itself specifically provide a basis for making the investment choice in
this circumstance, and (3) the economic interests of the plan are fully
protected by the fact that the available investment alternatives are,
from the plan's perspective, economically indistinguishable.
Given the significance of ERISA's requirement that fiduciaries act
``solely in the interest of participants and beneficiaries,'' the
Department believes that, before selecting an economically targeted
investment, fiduciaries must have first concluded that the alternative
options are truly equal, taking into account a quantitative and
qualitative analysis of the economic impact on the plan. ERISA's
fiduciary standards expressed in sections 403 and 404 do not permit
fiduciaries to select investments based on factors outside the economic
interests of the plan until they have concluded, based on economic
factors, that alternative investments are equal. A less rigid rule
would allow fiduciaries to act on the basis of factors outside the
economic interest of the plan in situations where reliance on those
factors might compromise or subordinate the interests of plan
participants and their beneficiaries. The Department rejects a
construction of ERISA that would render the Act's tight limits on the
use of plan assets illusory, and that would permit plan fiduciaries to
expend ERISA trust assets to promote myriad public policy
preferences.\3\
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\3\ See letters from the Department of Labor to Jonathan Hiatt
dated May 3, 2005; to Thomas Donahue dated December 21, 2007 (A.O.
2007-07A); and to David Chavern dated June 27, 2008 (A.O. 2008-05A).
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A plan fiduciary's analysis is required to comply with, but is not
necessarily limited to, the requirements set forth in 29 CFR 2550.404a-
1(b). In evaluating the plan portfolio, as well as portions of the
portfolio, the fiduciary is required to examine the level of
diversification, degree of liquidity, and the potential risk/return in
comparison with available alternative investments. The same type of
analysis must also be applied when choosing between investment
alternatives. Potential investments should be compared to other
investments that would fill a similar role in the portfolio with regard
to diversification, liquidity, and risk/return.
In light of the rigorous requirements established by ERISA, the
Department believes that fiduciaries who rely on factors outside the
economic interests of the plan in making investment choices and
subsequently find their decision challenged will rarely be able to
demonstrate compliance with ERISA absent a written record demonstrating
that a contemporaneous economic
[[Page 61736]]
analysis showed that the investment alternatives were of equal value.
Examples:
A plan owns an interest in a limited partnership that is
considering investing in a company that competes with the plan sponsor.
The fiduciaries may not replace the limited partnership investment with
another investment based on this fact unless they prudently determine
that a replacement investment is economically equal or superior to the
limited partnership investment and would not adversely affect the
plan's investment portfolio, taking into account factors including
diversification, liquidity, risk and expected return. The competition
of the limited partnership with the plan sponsor is a factor outside
the economic interests of the plan, and thus cannot be considered
unless an alternative investment is equal or superior to the limited
partnership.
A multiemployer plan covering employees in a metropolitan area's
construction industry wants to invest in a large loan for a
construction project located in the same area because it will create
local jobs. The plan has taken steps to ensure that the loan poses no
prohibited transaction issues. The loan carries a return fully
commensurate with the risk of nonpayment. Moreover, the loan's expected
return is equal to or greater than construction loans of similar
quality that are available to the plan. However, the plan has already
made several other loans for construction projects in the same
metropolitan area, and this loan could create a risk of large losses to
the plan's portfolio due to lack of diversification. The fiduciaries
may not choose this investment on the basis of the local job creation
factor because, due to lack of diversification, the investment is not
of equal economic value to the plan.
A plan is considering an investment in a bond to finance affordable
housing for people in the local community. The bond provides a return
at least as favorable to the plan as other bonds with the same risk
rating. However, the bond's size and lengthy duration raises a
potential risk regarding the plan's ability to meet its predicted
liquidity needs. Other available bonds under consideration by the plan
do not pose this same risk. The return on the bond, although equal to
or greater than the alternatives, would not be sufficient to offset the
additional risk for the plan created by the role that this bond would
play in the plan's portfolio. The plan's fiduciaries may not make this
investment based on factors outside the economic interest of the plan
because it is not of equal or greater economic value to other
investment alternatives.
A plan sponsor adopts an investment policy that favors plan
investment in companies meeting certain environmental criteria (so-
called ``green'' companies). In carrying out the policy, the plan's
fiduciaries may not simply consider investments only in green
companies. They must consider all investments that meet the plan's
prudent financial criteria. The fiduciaries may apply the investment
policy to eliminate a company from consideration only if they
appropriately determine that other available investments provide equal
or better returns at the same or lower risks, and would play the same
role in the plan's portfolio.
A collective investment fund, which holds assets of several plans,
is designed to invest in commercial real estate constructed or
renovated with union labor. Fiduciaries of plans that invest in the
fund must determine that the fund's overall risk and return
characteristics are as favorable, or more favorable, to the plans as
other available investment alternatives that would play a similar role
in their plans' portfolios. The fund's managers may select investments
constructed or improved with union labor, after an economic analysis
indicates that these investment options are equal or superior to their
alternatives. The managers will best be able to justify their
investment choice by recording their analysis in writing. However, if
real estate investments that satisfy both ERISA's fiduciary
requirements and the union labor criterion are unavailable, the fund
managers may have to select investments without regard to the union
labor criterion.
Signed at Washington, DC, this 9th day of October 2008.
Bradford P. Campbell,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. E8-24551 Filed 10-16-08; 8:45 am]
BILLING CODE 4510-29-P