(a) In general. Section 408(b)(2) of the Employee Retirement Income
Security Act of 1974 (the Act) exempts from the prohibitions of section
406(a) of the Act payment by a plan to a party in interest, including a
fiduciary, for office space or any service (or a combination of
services) if:
(1) Such office space or service is necessary for the establishment
or operation of the plan;
(2) Such office space or service is furnished under a contract or
arrangement which is reasonable; and
(3) No more than reasonable compensation is paid for such office
space or service.
However, section 408(b)(2) does not contain an exemption from acts
described in section 406(b)(1) of the Act (relating to fiduciaries
dealing with the assets of plans in their own interest or for their own
account), section 406(b)(2) of the Act (relating to fiduciaries in their
individual or in any other capacity acting in any transaction involving
the plan on behalf of a party (or representing a party) whose interests
are adverse to the interests of the plan or the interests of its
participants or beneficiaries) or section 406(b)(3) of the Act (relating
to fiduciaries receiving consideration for their own personal account
from any party dealing with a plan in connection with a transaction
involving the assets of the plan). Such acts are separate transactions
not described in section 408(b)(2). See Sec. 2250.408b-2 (e) and (f)
for guidance as to whether transactions relating to the furnishing of
office space or services by
[[Page 515]]
fiduciaries to plans involve acts described in section 406(b)(1) of the
Act. Section 408(b)(2) of the Act does not contain an exemption from
other provisions of the Act, such as section 404, or other provisions of
law which may impose requirements or restrictions relating to the
transactions which are exempt under section 408(b)(2). See, for example,
section 401 of the Internal Revenue Code of 1954. The provisions of
section 408(b)(2) of the Act are further limited by section 408(d) of
the Act (relating to transactions with owner-employees and related
persons).
(b) Necessary service. A service is necessary for the establishment
or operation of a plan within the meaning of section 408(b)(2) of the
Act and Sec. 2550.408b-2(a)(1) if the service is appropriate and
helpful to the plan obtaining the service in carrying out the purposes
for which the plan is established or maintained. A person providing such
a service to a plan (or a person who is a party in interest solely by
reason of a relationship to such a service provider described in section
3(14)(F), (G), (H), or (I) of the Act) may furnish goods which are
necessary for the establishment or operation of the plan in the course
of, and incidental to, the furnishing of such service to the plan.
(c) Reasonable contract or arrangement. No contract or arrangement
is reasonable within the meaning of section 408(b)(2) of the Act and
Sec. 2550.408b-2(a)(2) if it does not permit termination by the plan
without penalty to the plan on reasonably short notice under the
circumstances to prevent the plan from becoming locked into an
arrangement that has become disadvantageous. A long-term lease which may
be terminated prior to its expiration (without penalty to the plan) on
reasonably short notice under the circumstances is not generally an
unreasonable arrangement merely because of its long term. A provision in
a contract or other arrangement which reasonably compensates the service
provider or lessor for loss upon early termination of the contract,
arrangement or lease is not a penalty. For example, a minimal fee in a
service contract which is charged to allow recoupment of reasonable
start- up costs is not a penalty. Similary, a provision in a lease for a
termination fee that covers reasonably foreseeable expenses related to
the vacancy and reletting of the office space upon early termination of
the lease is not a penalty. Such a provision does not reasonably
compensate for loss if it provides for payment in excess of actual loss
or if it fails to require mitigation of damages.
(d) Reasonable compensation. Section 408(b)(2) of the Act and Sec.
2550.408b-2(a)(3) permit a plan to pay a party in interest reasonable
compensation for the provision of office space or services described in
section 408(b)(2). Section 2550.408c-2 of these regulations contains
provisions relating to what constitutes reasonable compensation for the
provision of services.
(e) Transactions with fiduciaries--(1) In general. If the furnishing
of office space or a service involves an act described in section 406(b)
of the Act (relating to acts involving conflicts of interest by
fiduciaries), such an act constitutes a separate transaction which is
not exempt under section 408(b)(2) of the Act. The prohibitions of
section 406(b) supplement the other prohibitions of section 406(a) of
the Act by imposing on parties in interest who are fiduciaries a duty of
undivided loyalty to the plans for which they act. These prohibitions
are imposed upon fiduciaries to deter them from exercising the
authority, control, or responsibility which makes such persons
fiduciaries when they have interests which may conflict with the
interests of the plans for which they act. In suchcases, the fiduciaries
have interests in the transactions which may affect the exercise of
their best judgment as fiduciaries. Thus, a fiduciary may not use the
authority, control, or responsibility which makes such person a
fiduciary to cause a plan to pay an additional fee to such fiduciary (or
to a person in which such fiduciary has an interest which may affect the
exercise of such fiduciary's best judgment as a fiduciary) to provide a
service. Nor may a fiduciary use such authority, control, or
responsibility to cause a plan to enter into a transaction involving
plan assets whereby such fiduciary (or a person in which such fiduciary
has an interest which may affect the exercise of such
[[Page 516]]
fiduciary's best judgment as a fiduciary) will receive consideration
from a third party in connection with such transaction. A person in
which a fiduciary has an interest which may affect the exercise of such
fiduciary's best judgment as a fiduciary includes, for example, a person
who is a party in interest by reason of a relationship to such fiduciary
described in section 3(14)(E), (F), (G), (H), or (I).
(2) Transactions not described in section 406(b)(1). A fiduciary
does not engage in an act described in section 406(b)(1) of the Act 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 theexercise of such fiduciary's best judgment
as a fiduciary. This may occur, for example, when one fiduciary is
retained on behalf of a plan by a second fiduciary to provide a service
for an additional fee. However, because the authority, control or
responsibility which makes a person a fiduciary may be exercised ``in
effect'' as well as in form, mere approval of the transaction by a
second fiduciary does not mean that the first fiduciary has not used any
of the authority, control or responsibility which makes such person a
fiduciary to cause the plan to pay the first fiduciary an additional fee
for a service. See paragraph (f) of this section.
(3) Services without compensation. If a fiduciary provides services
to a plan without the receipt of compensation or other consideration
(other than reimbursement of direct expenses properly and actually
incurred in the performance of such services within the meaning of Sec.
2550.408c-2(b)(3)), the provision of such services does not, in and of
itself, constitute an act described in section 406(b) of the Act. The
allowance of a deduction to an employer under section 162 or 212 of the
Code for the expense incurred in furnishing office space or services to
a plan established or maintained by such employer does not constitute
compensation or other consideration.
(f) Examples. The provisions of Sec. 2550.408b-2(e) may be
illustrated by the following examples.
Example (1). E, an employer whose employees are covered by plan P,
is a fiduciary of P. I is a professional investment adviser in which E
has no interest which may affect the exercise of E's best judgment as a
fiduciary. E causes P to retain I to provide certain kinds of investment
advisory services of a type which causes I to be a fiduciary of P under
section 3(21)(A)(ii) of the Act. thereafter, I proposes to perform for
additional fees portfolio evaluation services in addition to the
services currently provided. The provision of such services is arranged
by I and approved on behalf of the plan by E. I has not engaged in an
act described in section 406(b)(1) of the Act, because I did not use any
of the authority, control or responsibility which makes I a fiduciary
(the provision of investment advisory services) to cause the plan to pay
I additional fees for the provision of the portfolio evaluation
services. E has not engaged in an act which is described in section
406(b)(1). E, as the fiduciary who has the responsibility to be prudent
in his selection and retention of I and the other investment advisers of
the plan, has an interest in the purchase by the plan of portfolio
evaluation services. However, such an interest is not an interest which
may affect the exercise of E's best judgment as a fiduciary.
Example (2). D, a trustee of plan P with discretion over the
management and disposition of plan assets, relies on the advice of C, a
consultant to P, as to the investment of plan assets, thereby making C a
fiduciary of the plan. On January 1, 1978, C recommends to D that the
plan purchase an insurance policy from U, an insurance company which is
not a party in interest with respect to P. C thoroughly explains the
reasons for the recommendation and makes a full disclosure concerning
the fact that C will receive a commission from U upon the purchase of
the policy of P. D considers the recommendation and approves the
purchase of the policy by P. C receives a commission. Under such
circumstances, C has engaged in an act described in section 406(b)(1) of
the Act (as well as sections 406(b)(2) and (3) of the Act) because C is
in fact exercising the authority, control or responsibility which makes
C a fiduciary to cause the plan to purchase the policy. However, the
transaction is exempt from the prohibited transaction provisions of
section 406 of the Act, if the requirements of Prohibited Transaction
Exemption 77-9 are met.
Example (3). Assume the same facts as in Example (2) except that the
nature of C's relationship with the plan is not such that C is a
fiduciary of P. The purchase of the insurance policy does not involve an
act described in section 406(b)(1) of the Act (or sections
[[Page 517]]
406(b)(2) or (3) of the Act) because such sections only apply to acts by
fiduciaries.
Example (4). E, an employer whose employees are covered by plan P,
is a fiduciary with respect to P. A, who is not a party in interest with
respect to P, persuades E that the plan needs the services of a
professional investment adviser and that A should be hired to provide
the investment advice. Accordingly, E causes P to hire A to provide
investment advice of the type which makes A a fiduciary under Sec.
2510.3-21(c)(1)(ii)(B). Prior to the expiration of A's first contract
with P, A persuades E to cause P to renew A's contract with P to provide
the same services for additional fees in view of the increased costs in
providing such services. During the period of A's second contract, A
provides additional investment advice services for which no additional
charge is made. Prior to the expiration of A's second contract, A
persuades E to cause P to renew his contract for additional fees in view
of the additional services A is providing. A has not engaged in an act
described in section 406(b)(1) of the Act, because A has not used any of
the authority, control or responsibility which makes A a fiduciary (the
provision of investment advice) to cause the plan to pay additional fees
for A's services.
Example (5). F, a trustee of plan P with discretion over the
management and disposition of plan assets, retains C to provide
administrative services to P of the type which makes C a fiduciary under
section 3(21)(A)(iii). Thereafter, C retains F to provide for additional
fees actuarial and various kinds of administrative services in addition
to the services F is currently providing to P. Both F and C have engaged
in an act described in section 406(b)(1) of the Act. F, regardless of
any intent which he may have had at the time he retained C, has engaged
in such an act because F has, in effect, exercised the authority,
control or responsibility which makes F a fiduciary to cause the plan to
pay F additional fees for the services. C, whose continued employment by
P depends on F, has also engaged in such an act, because C has an
interest in the transaction which might affect the exercise of C's best
judgment as a fiduciary. As a result, C has dealt with plan assets in
his own interest under section 406(b)(1).
Example (6). F, a fiduciary of plan P with discretionary authority
respecting the management of P, retains S, the son of F, to provide for
a fee various kinds of administrative services necessary for the
operation of the plan. F has engaged in an act described in section
406(b)(1) of the Act because S is a person in whom F has an interest
which may affect the exercise of F's best judgment as a fiduciary. Such
act is not exempt under section 408(b)(2) of the Act irrespective of
whether the provision of the services by S is exempt.
Example (7). T, one of the trustees of plan P, is president of bank
B. The bank proposes to provide administrative services to P for a fee.
T physically absents himself from all consideration of B's proposal and
does not otherwise exercise any of the authority, control or
responsibility which makes T a fiduciary to cause the plan to retain B.
The other trustees decide to retain B. T has not engaged in an act
described in section 406(b)(1) of the Act. Further, the other trustees
have not engaged in an act described in section 406(b)(1) merely because
T is on the board of trustees of P. This fact alone would not make them
have an interest in the transaction which might affect the exercise of
their best judgment as fiduciaries.
[42 FR 32390, June 24, 1977]
