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Patricia A. Shlonsky
Ulmer & Berne, LLP
Bond Court Building
1300 East Ninth Street, Suite 900
Cleveland, Ohio 44114-1583
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1999-09A
ERISA Sec. 406, 408(b)
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Dear Ms. Shlonsky:
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This is in response to your request for an advisory opinion on behalf of the
Northeast Ohio Carpenters’ Joint Apprenticeship and Training Trust Fund
(the Fund). Specifically, you ask whether the Fund would engage in a
prohibited transaction under section 406 of the Employee Retirement Income
Security Act of 1974, as amended, (ERISA) if it retained and compensated,
for the purpose of constructing an addition to the Fund’s training
facility, a general contractor or subcontractor that employs or is owned by
a plan fiduciary.
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You represent that the Fund, a welfare plan that provides training to
apprentices, journeymen and other members of the Northeast Ohio District
Council of the United Brotherhood of Carpenters and Joiners of America,
AFL-CIO (the Union), is administered by the Northeast Ohio Joint
Apprenticeship Training Committee (the Committee). The Committee consists of
at least seven Union representatives and seven management representatives.
The Fund maintains a facility in Richfield, Ohio. The facility was
constructed in 1990 and is used to provide apprenticeship training to plan
participants.
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You further represent that the Committee intends to construct an addition to
its apprenticeship training facility. You indicate that an addition to the
facility is necessary to the operation of the plan due to significant growth
in the number of apprentices and journeymen for whom the fund provides
training, combined with a need to provide additional types of training as
mandated by federal law.
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You represent that the Committee intends to solicit bids for a general
contractor to supervise the overall project of building the addition and
that it intends to retain an independent architect to review all bids and
make recommendations to the Committee with respect to the selection of the
general contractor. You anticipate that certain contractors who have
representatives on the Committee will submit bids to serve as the general
contractor for this project and possibly for other projects in the future.(1)
To the extent that a contractor submits a bid and is recommended to the
Committee by the independent architect, the Committee member related to that
contractor will remove him or herself from the decision making process. You
further represent that, in the event the Committee member’s entity is
selected as the general contractor, the Fund would compensate the entity for
whom the Committee member works and would not compensate the Committee
member directly.
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You also indicate that it is possible that the general contractor selected
to build the addition will retain subcontractors who have representatives on
the Committee. These subcontractors will be specifically listed as part of
the bidding process. In the event a proposed subcontractor has a
representative on the Committee, the Committee member related to that
subcontractor also would remove him or herself from the decision making
process.
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You ask whether the retention of a general or subcontractor under the
above-described circumstances would violate the provisions of section 406 of
ERISA.
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An employer that contributes to a plan is a party in interest with respect
to the plan pursuant to section 3(14)(C) of ERISA. A fiduciary with respect
to a plan is also a party in interest with respect to the plan pursuant to
section 3(14)(A) of ERISA. As defined in section 3(21)(A) (i) and (iii), a
person is a fiduciary with respect to a plan to the extent that he or she
exercises any discretionary authority or discretionary control respecting
the management of such plan or exercises any authority or control respecting
the management or disposition of its assets, or to the extent that he or she
has any discretionary authority or responsibility in the administration of
such plan. Therefore, any person who serves as a Committee member is a
fiduciary with respect to the Plan.
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Section 406(a)(1)(C) of ERISA prohibits a fiduciary with respect to a plan
from causing the plan to engage in a transaction that he or she knows or
should know constitutes a direct or indirect furnishing of goods, services
or facilities between the plan and a party in interest. Section 406(a)(1)(D)
prohibits such a fiduciary from causing a plan to engage in a transaction
that he or she knows or should know constitutes a transfer to, or use by or
for the benefit of, a party in interest, of any assets of the plan. Thus, in
the absence of an administrative or statutory exemption, the provision of
goods or services to a plan by a contributing employer with respect to a
plan would be a prohibited transaction under sections 406(a)(1)(C) and
406(a)(1)(D) of ERISA.
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Subject to the conditions set forth in section 408(d) of ERISA, section
408(b)(2) of ERISA exempts from the prohibitions of section 406(a) a payment
by a plan to a party in interest, including a fiduciary, for a service (or a
combination of services) if: (1) such service is necessary for the
establishment or operation of the plan; (2) such service is furnished under
a contract or arrangement which is reasonable; and (3) no more than
reasonable compensation is paid for such service. Regulations issued by the
Department clarify the terms “necessary service” (29 C.F.R. §
2550.408b-2(b)), “reasonable contract or arrangement” (29 C.F.R. §
2550.408b-2(c)), and “reasonable compensation” (29 C.F.R. §
2550.408c-2), as used in section 408(b)(2) of ERISA.
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We note as a preliminary matter that the decision to build an addition to
the training facility using the Fund’s assets is a fiduciary decision
governed by the provisions of Title I of ERISA, including the duty of
loyalty contained in sections 403(c) and 404(a)(1)(A) and the duty of
prudence contained in section 404(a)(1)(B), cf. 29 C.F.R. § 2509.94-1. It
is also, as is any decision involving plan assets, subject to the prohibited
transaction provisions in section 406.
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A party in interest’s provision of the contracting services to build the
addition would be exempt from the prohibitions of section 406(a)(1) of ERISA
if the conditions described in section 408(b)(2) were met. We note, however,
that the questions of what constitute a necessary service, a reasonable
contract or arrangement, and reasonable compensation are inherently factual
in nature. The Department generally will not issue opinions on such
questions. The Committee members or other appropriate Fund fiduciaries would
be required to determine, based on all the relevant facts and circumstances,
whether the conditions of section 408(b)(2) were met.
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Section 408(b)(2) and the regulations promulgated thereunder, however, do
not provide an exemption from the prohibitions of section 406(b) of ERISA.
Section 406(b)(1) prohibits a plan fiduciary from dealing with plan assets
in his or her own interest or for his or her own account. Section 406(b)(2)
prohibits such a fiduciary from acting in a transaction involving the plan
in his or her individual or in any other capacity on behalf of or as
representative of a party whose interests are adverse to the interests of
the plan or of its participants and beneficiaries. In this regard, 29 C.F.R.
§ 2550.408b-2(e) of the Department’s regulations explains that a
fiduciary may avoid engaging in an act described in ERISA section 406(b)(1)
if such fiduciary does not use the authority, control or responsibility that
makes such person a fiduciary to cause a plan 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.
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If a Committee member, in the situation you describe, uses the authority,
control or responsibility that makes him or her a fiduciary to cause the
Fund to pay a fee for contracting services furnished by himself or herself
or by a person in whom such Committee member has an interest that may affect
the exercise of his or her best judgment as a fiduciary, such as, for
example, a contributing employer that employs such Committee member, the
Committee member would be engaging in, among other things, an act described
in section 406(b)(1) of ERISA. Moreover, if a Committee member uses the
authority, control, or responsibility that makes him or her a fiduciary to
cause the Fund to reject the bid of a contractor or subcontractor under
circumstances in which an entity in which the fiduciary has an interest had
submitted a competing bid for the project, the committee member would
likewise be engaging in, among other things, an act described in section
406(b)(1) of ERISA. Similarly, if a Committee member, or an entity in which
the Committee member had an interest, intended to submit a bid for the
project, then the Committee member’s participation in the Committee’s
consideration of the terms and conditions of the bid solicitation would
constitute an act described in section 406(b)(1) of ERISA. Such acts by the
Committee member would also be in violation of the prohibitions of section
406(b)(2) of ERISA.
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In AO 79-72A (Oct. 10, 1979 letter to William D.
Watters, Esq.), the Department concluded, with the respect to the
provision of training services by contributing employers to an
apprenticeship training fund, that by removing himself or herself from all
consideration by the Plan of whether or not to engage in such a
transaction, and by not otherwise exercising, with respect to the
transaction, any of the authority, control or responsibility which makes
him or her a fiduciary, and absent any arrangement, agreement or
understanding with respect to who will ultimately provide the services in
question, a Committee member may avoid engaging in an act described in
sections 406(b)(1) or 406(b)(2) of ERISA.
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In the situation you have described, recusal would be
sufficient only if the Committee member recuses him or herself from all
consideration by the Fund of whether or not to engage in the transaction
as of the time that the entity in which the Committee member has an
interest intends to enter a bid for the project, whether in the capacity
of a general contractor or a subcontractor. Furthermore, recusal itself
would not be sufficient if there is any arrangement, agreement or
understanding between or among Committee members and/or other parties in
interest with regard to bidding on contracts, awarding contracts, or the
hiring subcontractors paid for with Fund assets, whether such arrangement,
agreement, or understanding arises prior to, during, or after the recusal,
and whether such arrangement, agreement, or understanding concerns the
present project, related projects, or future projects.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is
issued subject to the provisions of that procedure, including section 10
thereof, relating to the effect of advisory opinions.
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Sincerely,
Susan G. Lahne
Acting Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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You note, however, that with respect
to future projects, an independent architect would likely not be
utilized unless the size of the project warranted retention of such an
individual. However, Committee members affiliated with entities
bidding on the projects would recuse themselves from the decision
making process.
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