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Dear Ms. St. Martin and Mr. Saxon:
This is in response to your request on behalf of the Hartford Life
Insurance Company (Hartford) for an advisory opinion under the Employee
Retirement Income Security Act of 1974, as amended (ERISA). Specifically,
you seek guidance regarding the definition of a “separate account”
contained in section 3(17) of ERISA.
You represent that Hartford, a Connecticut corporation, is a stock life
insurance company engaged in the business of offering life insurance
policies and annuities to individuals, corporations, groups and employee
benefit plans in all states of the United States as well as the District
of Columbia. Hartford is ultimately controlled by The Hartford Financial
Services Group, Inc., one of the largest financial services providers in
the United States.
You represent that Hartford maintains a pooled separate account funded
through life insurance policies (Policy). The form of the Policy has been
submitted to and approved by the applicable state insurance department.
Policyholders include ERISA-covered plans as well as plans and other
entities not covered by ERISA.
The separate account is divided into divisions (Divisions), each of
which has a different investment objective or style. You represent that
Hartford is the legal owner of all separate account assets and that at the
Hartford’s custodian the assets allocated to each Division are titled
separately and that Hartford’s title reflects the specific Division to
which the assets have been allocated. You represent that the use of
multiple Divisions within a separate account as opposed to multiple
separate accounts, each having a single investment pool, reduces the
insurer’s costs of administering the accounts thereby permitting it to
offer to the Investor a more cost competitive product.
Each policyholder (Investor) directs the investment of its premiums in
one or more of the Divisions. You represent that, once a Division is
selected, the Investor's interest in the Division and return on investment
is determined under the Policy's provisions. You represent that the Policy
describes the allocation of premiums, expenses and income and the
calculation of the investment return of each Division. The Divisions are
described as "portfolios" within a single separate account. You
represent that the income, gains and losses of each Division are
calculated exactly as they would be if the Division were established as an
individual "separate account."
You represent that the Policy provides for the calculation of
investment value (Investment Value) by Division. You represent that
Investment Value is calculated for the separate account as a whole, but
this amount is simply the sum of the Investment Values of the Divisions,
and is used to reflect the Investor’s entire interest in the Policy. The
Investment Value of each Division is based upon the earnings and expenses
attributable to the assets allocated to that Division alone. Specifically,
you represent that a Division's Investment Value is the sum of (i) the
Investment Value for the preceding valuation period, (ii) the Investment
Value for the preceding valuation period multiplied by the net rate of
return for the current valuation period, (iii) any experience credits or
premium payments allocated to the Division during the current valuation
period, less the sum of (A) loan debits or credits or withdrawals, and (B)
administrative and insurance charges.(1)
You represent that the mechanical
application of these Policy rules results in the allocation to each
Division of the gains and losses attributable to the assets invested in
that Division (and not to the assets (or liabilities) of any other
Division or to Hartford's general account). You represent that these rules
are reiterated by Hartford in the Private Placement Memorandum issued for
the Policy.
You have asked for an advisory opinion as to whether each Division, as
described above, qualifies as a distinct “separate account” within the
meaning of ERISA section 3(17).
The plan assets regulation at 29 CFR § 2510.3-101 defines when a plan’s
investment in another entity causes that entity’s underlying assets to
be “plan assets.” The plan assets regulation imposes a “look-through”
rule based on the premise that, with certain exceptions, when a plan
indirectly retains investment management services by investing in a pooled
investment vehicle, the assets of the vehicle should be viewed as plan
assets and managed according to the fiduciary responsibility provisions of
ERISA. In situations outside the scope of the plan assets regulation and
the Department’s “participant contribution” regulations at 29 CFR §
2510.3-102, the assets of an employee benefit plan generally are to be
identified on the basis of ordinary notions of property rights. See,
e.g.,
Advisory Opinion No. 99-08A (May 20, 1999).
The plan assets regulation provides at 29 CFR § 2510.3-101(a)(2) that,
in the case of a plan’s investment in an equity interest of an entity,
the plan’s assets include both the equity interest and an undivided
interest in each of the underlying assets of the entity unless equity
participation in the entity by benefit plan investors is not “significant,”
the entity is an operating company, or the equity interest held by the
plan is a publicly-offered security or a security issued by an investment
company registered under the Investment Company Act of 1940.
The plan assets regulation provides at 29 CFR § 2510.3-101(h)(1)(iii)
that, notwithstanding any other provision in the regulation, if a plan
acquires or holds an interest in a separate account of an insurance
company, other than a separate account that is maintained solely in
connection with fixed contractual obligations of the insurance company
under which the amounts payable, or credited, to the plan (including an
annuitant) are not affected in any manner by the investment performance of
the separate account, the plan’s assets include the investment in the
separate account and each of the underlying assets of the separate
account, unless the separate account is registered as an investment
company under the Investment Company Act of 1940. Under this regulation,
once a plan acquires or holds an interest in a pooled separate account,
all of the assets of the separate account become plan assets. 29 CFR §
2510.3-101(h)(1)(iii).
Section 3(17) of ERISA defines the term “separate account” as an
account established or maintained by an insurance company under which
income, gains and losses, whether or not realized, from assets allocated
to such account, are, in accordance with the applicable contract, credited
to or charged against such account without regard to other income, gains
or losses of the insurance company.
You represent that, according to the Policy, the income, gains and
losses attributable to the assets of each Division, whether or not
realized, are credited to or charged against the assets invested in that
Division and not to the assets of any other Division or to the insurer’s
general account and without regard to other income, gains or losses of
other Divisions or the insurer’s general account. Further, you represent
that each Division has a different investment objective or style. Based on
the foregoing, it is the Department’s view that each Division of the
pooled separate account, would itself be a “separate account” within
the meaning of section 3(17) of ERISA. Each Division would likewise be
considered a distinct separate account under the plan asset regulation. 29
CFR § 2510.3-101.
This letter constitutes an advisory opinion under ERISA Procedure 76-1.
Accordingly, it is subject to the provisions of that procedure, including
section 10 thereof relating to the effect of advisory opinions.
Sincerely,
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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A Division’s experience factor for
a valuation period is the ratio of the Division’s net assets at the
end of the valuation period (before recognizing transfers in or out)
over the Division’s net assets at the end of the preceding valuation
period, less the mortality, expense and risk charges, and taxes for
the current valuation period. A Division’s net rate of return is the
experience factor minus 1.
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