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Theodore R. Groom
Groom Law Group
1701 Pennsylvania Ave., NW
Washington, D.C. 20006-5893
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2001-02A
ERISA Sec. 3(21)(A)
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Dear Mr. Groom:
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This is in response to your request for an advisory opinion under Title I of
the Employee Retirement Income Security Act of 1974 (ERISA) in connection
with The Prudential Insurance Company of America’s (Prudential) proposed
plan of demutualization. You ask whether Prudential will be acting in a
fiduciary capacity when it provides its policyholders with certain
information regarding the allocation of demutualization proceeds
attributable to those policyholders. You also ask whether Prudential would
be acting in a fiduciary capacity if it implements a specified default
method of allocating demutualization consideration among participating
individuals in 401(k) type plans for which Prudential provides
administrative services such as record keeping, and among participating
individuals in certain group contract payroll deduction individual
retirement annuity and tax deferred annuity arrangements (IRAs and TDAs)(1)
where Prudential provides advance notice to the group policyholder that the
allocation method will be implemented if the policyholder does not direct
Prudential otherwise by a specified deadline.
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You represent that Prudential is a mutual life insurance company. As a
mutual life insurance company, Prudential has no authorized, issued, or
outstanding stock. Instead, the insurance and annuity policies issued by
Prudential combine both insurance coverage and proprietary ownership rights
(sometimes referred to as membership rights). You indicate that Prudential
is reviewing a proposed draft plan of reorganization (Plan or Plan of
Reorganization) to convert from a mutual life insurance company to a stock
life insurance company (a process known as demutualization). The Plan of
Reorganization is subject to the review and approval of Prudential’s Board
of Directors and the Commissioner of Banking and Insurance of the State of
New Jersey (New Jersey Commissioner). You state that New Jersey law requires
that policy holders who are qualified voters vote as to whether to approve
the plan. In the case of a group policy, the qualified voter, as described
in more detail in Advisory Opinion 2001– 03A, generally is the person or
entity to whom the policy is issued (often an employer), rather than each
individual who is covered under the arrangement.
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As a stock company, Prudential will gain access to public equity and debt
markets. The plan will propose that 100% of the equity value of Prudential
(currently estimated to be between 15 and 20 billion dollars) will be
distributed to eligible policyholders in the form of stock, cash, or policy
credits. All of Prudential’s policyholder obligations will remain
unchanged and fully in force after the conversion.
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If the Plan of Reorganization is approved, the membership interests of all
policyholders will be extinguished. Payments of stock, cash, or policy
credits (i.e., enhancements to policy values) will be made in consideration
of the policyholders’ extinguished membership rights in Prudential. The
amount of the distributions will be established pursuant to actuarial
valuations reviewed and approved by the New Jersey Commissioner.
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You represent that under Prudential’s proposed demutualization, there are
two components of compensation for eligible policyholders — fixed and
variable. Each eligible policyholder will be allocated the same basic fixed
component. The variable component will be provided to those eligible
policyholders whose policies produce a positive contribution to
Prudential’s surplus. The variable component focuses on the contribution
of the policy as a whole to Prudential’s surplus, including both the
historical and anticipated future contributions to surplus. A policy’s
contribution to surplus is determined by identifying the profit and expense
associated with that contract. Profits and expenses can be affected by, for
example, the type of policy, the date it was issued, and the period during
which it was outstanding. Moreover, Prudential’s surplus, as reflected on
applicable financial statements, will not be distributed to policyholders.
Instead, the relative contribution to surplus of each eligible contract is
determined, and then each policyholder is given a corresponding percentage
allocation. That percentage allocation is then translated into a number of
shares, and the results of the initial public offering will determine the
value of those shares.
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You represent that Prudential has issued tens of thousands of contracts that
provide benefits under ERISA-covered employee benefit plans. With respect to
these ERISA plans, the policyholder must decide how to use the consideration
that is a plan asset.(2) In this regard, Prudential expects that
group policyholders may seek Prudential’s assistance as follows.
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Prudential provides participant-level services (e.g., record keeping and
administrative services) to some group policyholders who administer ERISA-covered
plans. These policyholders may be required to allocate some or all of the
consideration among participants that participate in the plans. Prudential
would like to identify for these group policyholders the types of
participant allocation methods Prudential is capable of implementing through
its record keeping systems. Where the policyholder is required to allocate
the consideration, and Prudential is the record keeper for the plan,
Prudential, as record keeper, will have to record allocations among accounts
at the time the proceeds are distributed in order to comply with the
obligations to policyholders under the Plan of Reorganization.
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In the case of section 401(k) plans for which Prudential provides record
keeping and other administrative services, Prudential would provide a notice
to the group policyholder indicating that Prudential could accommodate an
instruction from the policyholder to allocate consideration: (1) on a per capita basis, i.e., equal
allocation of consideration to each eligible participant; (2) on a pro rata basis, i.e., allocate
according to the value of the participant account. Prudential would also indicate that it would discuss and consider the
feasibility of implementing any other allocation instruction in which the
policyholder may be interested.
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Prudential contemplates that when or soon after it notifies the
policyholders of the amount of consideration the policyholders will receive,
Prudential will also describe to the policyholders the alternatives offered
by it for allocating the consideration to the participants (if the policy
only funds one employee plan) or to the particular employee benefit plans
(if the policy funds more than one plan). In describing these alternatives,
neither Prudential, nor any of its affiliates, would provide any advice or
recommendations to the policyholder on which option, if any, to choose. The
policyholder would be free to choose a different approach and to explore the
feasibility of having Prudential implement that approach. Prudential will
follow the directions of the policyholder so long as it is administratively
feasible.
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Specifically, you represent that in connection with the vote, each
policyholder, including group policyholders, will be provided with a
Policyholder Information Booklet, that provides: (1) notice of a public hearing to be
held by the insurance department; (2) notice of the policyholder vote;
(3) a detailed summary of the proposed plan.
Prudential will also provide a Group Guide to group policyholders.
The Group Guide identifies issues that must be
addressed by plans, group TDAs and group IRAs receiving demutualization
proceeds, including the possibility that proceeds will have to be
allocated among individual participants (certificate holders) covered by a
group policy or contract.
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Following the distribution of the Group Guide, Prudential will send a letter
to each group policyholder: (1) specifically describing the methods of
allocating the proceeds among the individual participants (certificate
holders) covered by the group policy or contract that Prudential is
administratively able to implement; (2) soliciting the group policyholder’s
direction as to its desired participant allocation method (Allocation
Letter). A follow-up letter (Follow-up Letter) will be sent to those group
policyholders who have not provided an affirmative participant allocation
direction within 30 days after the Allocation Letter is sent. The Follow-up
Letter will reiterate Prudential’s request for an affirmative direction,
but will indicate that if a direction is not received by a date that is at
least 30 days from the date of the Follow-up Letter, the policyholder will
be deemed to have directed Prudential to implement the default allocation
method (i.e., the per capita method).
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A policyholder thus will have at least 60 days to consider its specific
options for the participant allocation method. Moreover, a policyholder will
have been aware of the issue and of the need to select an allocation method
for a significantly longer period of time. If Prudential receives an
affirmative, written direction in response to the Allocation or Follow-up
Letters, or otherwise, from the policyholder as to how to allocate the
consideration, as part of its record keeping and administrative services,
Prudential would allocate the consideration on the basis of this direction.
If Prudential receives instruction for an allocation that its systems could
not accommodate, Prudential would notify the policyholder and discuss
possible alternatives.
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Prudential also wishes to provide policyholders of policies that fund more
than one ERISA-covered employee benefit plan a calculation of the amount of
consideration (as a percentage of the total consideration paid in respect of
the policy) that is attributable to each employee benefit plan funded by the
insurance policy. This information will be currently available to Prudential
because, in calculating the total consideration payable with respect to the
policy, Prudential first determines on a plan-by-plan basis the amount of
surplus that is attributable to each plan covered by the particular policy.
Thus, you represent that Prudential will make available to the policyholder
its determination of consideration based on the amount of surplus that each
employee benefit plan contributed applying the same actuarial methods
provided under the Plan of Reorganization.
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If Prudential receives an affirmative, written direction from the
policyholder as to how to allocate the consideration among the plans covered
by the policy, it will follow those directions. If the policyholder fails to
direct Prudential as to allocation of the proceeds among multiple plans,
Prudential will distribute the entire amount of the consideration to the
policyholder, as required by the Plan of Reorganization and state law.
Prudential will not implement a default allocation between plans under a
single policy. Prudential also will not implement a default participant
allocation where there has been no plan allocation. However, if a
policyholder provides an affirmative direction to Prudential allocating the
consideration due under a single policy to more than one plan, Prudential
will implement that direction. If one or more of the plans to which the
consideration is allocated provides for participant accounts, Prudential
will provide the same process described above for group policies covering
only one plan that have participant accounts.
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With respect to Prudential’s selection of the per
capita method as the default allocation method among participants, you
believe that because the demutualization consideration allocated to each
policy is not determined on an accretion basis, and because the
profitability of a given contract during a given period does not
necessarily correlate to the premiums paid or amounts invested under the
contract during that time, it would not be appropriate or useful to look
to Prudential’s methodology for allocating consideration to
policyholders as a model for allocating consideration among individual
participants (certificate holders) covered by a group policy. You note
that the most likely of the possible allocation methods among individual
participants (certificate holders) in a group policy are pro rata by
account balance (or premiums paid) or per capita. You indicate that
neither method is necessarily more appropriate in all cases. For example,
the pro rata approach may recognize the relative amounts paid into the
contract by individual participants, but it allocates to current
participants with large current balances (or premium histories) a higher
share of the historical surplus, a surplus that may have been attributable
to long-departed employees. The per capita approach generally will
allocate an equal share of the group contract’s demutualization proceeds
to all the individual participants (certificate holders) covered under the
group contract (even lower-paid participants with small overall account
balances) and will not favor highly compensated employees, but does not
recognize that the higher premiums paid by certain certificate holders
might have contributed to Prudential’s profitability.
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You represent that Prudential will use the per capita
method as the default allocation method for those record keeping clients
(as well as the TDA and IRA clients) who do not affirmatively designate an
allocation method. The per capita method was chosen because Prudential
concluded it was fair under the circumstances.(3) The per
capita method is not less expensive to administer than other methods and
cost was not a consideration in choosing the default method.
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The circumstances under which Prudential provides
record keeping and administrative services to plans, you believe, would
not cause Prudential to be considered a fiduciary.(4) You seek
assurance, however, that Prudential will not be deemed to be a fiduciary
with respect to a plan merely by virtue of: (1) providing to eligible group
policyholders a description of administratively-feasible alternatives
for allocating demutualization consideration to participants or plans,
and then; (2) with respect to allocation among
participants, following the policyholders’ directions (including
direction by negative consent) regarding allocation.
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ERISA section 3(21)(A) provides that a person is a
fiduciary with respect to a plan to the extent that he or she: (1)
exercises any discretionary
authority or control respecting management of the plan or exercises
any authority or control respecting management or disposition of its
assets; (2) renders investment advice for a fee
or other compensation, direct or indirect, with respect to any moneys
or other property of the plan, or has any authority or responsibility
to do so; (3) has any discretionary authority or
responsibility in the administration of the plan.(5)
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Interpretive Bulletin 75-8 (IB 75-8, 29 CFR 2509.75-8)
provides additional guidance concerning what types of functions will make
a person a fiduciary with respect to a plan. In particular,
question-and-answer D-2 states that a person who performs purely
ministerial functions, such as preparation of employee communications
material, preparation of government reports, and preparation of reports
concerning participants' benefits, among others, within a framework of
policies, interpretations, rules, practices and procedures made by other
persons is not a fiduciary because such person does not have or exercise
any discretionary authority or control regarding the management of the
plan or its assets.
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Pursuant to these provisions, a determination of
whether a person is a fiduciary with respect to a plan requires an
analysis of the types of functions performed and actions taken by the
person on behalf of the plan to determine whether particular functions or
actions are fiduciary in nature and therefore subject to ERISA's fiduciary
responsibility provisions. As a result, the question of whether Prudential
is a fiduciary within the meaning of section 3(21)(A) of ERISA is
inherently factual and will depend on the particular actions or functions
Prudential performs on behalf of plans.
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It is the view of the department, however, that a
person would not be exercising discretionary authority or control over the
management of a plan or its assets solely as a result of providing
information to its policyholders or clients for whom it provides record
keeping or other administrative services regarding what actions are
administratively feasible for it to implement in connection with corporate
and state laws that require action be taken by the policyholder for the
plan. Moreover, as long as the appropriate plan fiduciary makes the
decision as to which of the feasible actions should be implemented, the
person implementing this decision would not become a fiduciary.
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On the basis of your representations that Prudential
must take action to make some allocation to comply with the Plan of
Reorganization and that Prudential will provide the policyholder advance
notice of the allocation options and a reasonable period of time (here at
least 60 days) to select an option, it is the view of the department that
Prudential would not become a fiduciary solely as a result of providing
this information. In addition, as long as the plan fiduciary actually
chooses the default allocation, its failure to communicate affirmatively
that decision to Prudential would not cause Prudential to become a
fiduciary by implementing that option. Whether a particular plan fiduciary
actually chooses the default allocation is an inherently factual question.
The department generally will not provide an opinion on such questions.
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It should be noted that to the extent that a plan
fiduciary in the exercise of his or her fiduciary responsibility is making
the determination as to how the demutualization proceeds should be
allocated, ERISA’s general standards of fiduciary conduct would apply to
the determination. Under section 404(a)(1) of ERISA, the responsible plan
fiduciaries must act solely in the interest of the plan participants and
beneficiaries. In this regard, the department notes that a fiduciary has a
duty of impartiality to the plan’s participants, and a selection of an
allocation method that benefits the fiduciary, as a participant in the
plan, at the expense of other participants in the plan will be
inconsistent with this duty. See Restatement (Second) of Trusts § 183
(requiring fiduciaries to deal impartially with beneficiaries). Moreover,
in situations where multiple plans are covered by a single policy, the use
of proceeds generated by one plan to benefit the participants of another
plan may be a breach of the duty of loyalty to a plan’s participants.
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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,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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You have represented that certain of
the IRAs and TDAs at issue are otherwise exempt from coverage under
Title I of ERISA by virtue of 29 CFR 2510.3-2(d) and (f). The coverage
implications of the determinations regarding the vote on the
demutualization and the allocation among participating individuals are
addressed in Advisory Opinion 2001– 03A, issued simultaneously with
this letter. We note, however, that even if the IRAs and TDAs are not
subject to Title I of ERISA, they still are subject to the prohibited
transaction provisions of section 4975 of the Internal Revenue Code
(the Code), and the definition of fiduciary under section 4975(e)(3).
Under Presidential Reorganization Plan No. 4 of 1978, the authority of
the Secretary of the Treasury to issue interpretations regarding
section 4975 has been transferred, with certain exceptions not here
relevant, to the Secretary of Labor.
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The proceeds of the demutualization
will belong to the plan if they would deemed to be owned by the plan
under ordinary notions of property rights. See Advisory Opinion
92-02A, Jan. 17, 1992 (assets of a plan generally are to be identified
on the basis of ordinary notions of property rights under non-ERISA
law). It is the view of the department that, in the case of an
employee welfare benefit plan with respect to which participants pay a
portion of the premiums, the appropriate plan fiduciary must treat as
plan assets the portion of the demutualization proceeds attributable
to participant contributions. In determining what portion of the
proceeds are attributable to participant contributions, the plan
fiduciary should give appropriate consideration to those facts and
circumstances that the fiduciary knows or should know are relevant to
the determination, including the documents and instruments governing
the plan and the proportion of total participant contributions to the
total premiums paid over an appropriate time period. In the case of an
employee pension benefit plan, or where any type of plan or trust is
the policyholder, or where the policy is paid for out of trust assets,
it is the view of the department that all of the proceeds received by
the policyholder in connection with a demutualization would constitute
plan assets.
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Prudential has chosen the per capita
allocation method for the Prudential-sponsored plans.
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You have not asked, and we do not
provide any opinion, on whether Prudential’s provision of record
keeping services to certain policyholders or 401(k) plans makes
Prudential a fiduciary. Nor have you provided any information
indicating whether Prudential otherwise acts in a fiduciary or trustee
capacity with respect to any of the plans affected by the
demutualization. To the extent that Prudential in fact is, or were to
be deemed to be, a fiduciary, it would, in following the directions of
the plan fiduciaries with respect to the allocation, have the same
fiduciary obligations as any other fiduciary or trustee acting in
accordance with the direction of other plan fiduciaries, including
rejection of allocation instructions contrary to ERISA.
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The discussion in this letter of
ERISA section 3(21)(A) also applies to Code section 4975(e)(3).
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