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Mr. Gary E. Henderson
President, Qualified Plan Services, L.L.C.
1100 Chase Square
Rochester, New York 14604-1999
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Dear Mr. Henderson:
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This is in response to your request for an advisory opinion on behalf of
Qualified Plan Services, L.L.C. (QPS) regarding the application of the
Employee Retirement Income Security Act of 1974 (ERISA) to the payment of
certain expenses by multiemployer pension plans. Specifically, you asked
whether the trustees of a multiemployer plan would violate the fiduciary
provisions of ERISA if they used plan assets to purchase a package
comprising compliance audits linked to a specific insurance product.
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You represent that QPS intends to market this audit/insurance package to
multiemployer plans. The compliance audits would be conducted by auditors,
employed by or affiliated with QPS, who would examine whether such plans
were being operated in accordance with their governing documents and
applicable federal law. To this end, the compliance audits would include,
but not be limited to, an examination of the administrative aspects of a
plan’s routine operations, including the plan’s collection of
contributions, payment of benefits, and investment of assets, as well as its
compliance with the qualification provisions in the Internal Revenue Code
(Code).(1) The results of the compliance
audits would be transmitted to the trustees.
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In addition to the compliance audits, QPS would provide insurance against
any “loss” to the plan occasioned by operational defects within the
scope of, but not identified by the compliance audits, including any payment
of sanctions by the plan to the Internal Revenue Service (IRS) to settle
disqualification claims asserted by that agency. The term “loss,”
however, would not include harm to the plan occasioned by fiduciary
violations of sections 403(c), 404, 405, or 406 of ERISA.
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Whether the payment of any particular expense would be an appropriate
expenditure of plan assets is the type of determination that can only be
made by the plan fiduciaries in light of all the relevant facts and
circumstances of a given case. The Department of Labor (Department)
ordinarily will not opine with regard to questions of an inherently factual
nature. See section 5.01 of ERISA Procedure 76-1, 41 Fed. Reg. 36281 (August
27, 1976). Therefore, we are responding to your request in the form of an
information letter, the effect of which is described in section 11 of ERISA
Procedure 76-1.
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Section 404(a)(1)(D) of ERISA requires plan fiduciaries to discharge their
duties in accordance with the documents and instruments governing the plan
insofar as such documents and instruments are consistent with the provisions
of Title I of ERISA. In evaluating the payment by a plan of particular
expenses, the fiduciaries must first examine the language of the plan
documents. If the expense would be permitted under the terms of the plan
documents, then the fiduciaries must determine whether such payment would be
consistent with Title I of ERISA.
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In determining whether a given expenditure is consistent with Title I of
ERISA, plan fiduciaries must consider the standards of conduct set forth in
Part 4 of Subtitle B of Title I of ERISA. In particular, section 403(c)(1)
provides, subject to certain exceptions not here relevant, that the assets
of an employee benefit plan shall never inure to the benefit of any employer
and shall be held for the exclusive purpose of providing benefits to
participants and beneficiaries and defraying reasonable expenses of
administering the plan. Similarly, section 404(a)(1)(A) requires that plan
fiduciaries discharge their duties to the plan solely in the interest of the
participants and beneficiaries and for the exclusive purpose of providing
them benefits and defraying reasonable expenses of administering the plan.
Section 404(a)(1)(B) requires a fiduciary to discharge his or her duties to
a plan with the care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent person acting in a like capacity and familiar
with such matters would use in the conduct of an enterprise of like
character with like aims.
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With respect to sections 403(c)(1) and 404(a)(1)(A), it
is the view of the Department that, as a general rule, reasonable expenses
of administering a plan include direct expenses properly and actually
incurred in the performance of a fiduciary’s duties to the plan. Thus, if
the trustees of a multiemployer plan were to determine that periodic
compliance audits of the type you describe were a helpful and prudent means
of carrying out their fiduciary duties, including the duty under ERISA
404(a)(1)(D) to operate the plan in accordance with its terms, then the use
of plan assets to procure such services would not in and of itself violate
sections 403 and 404 of ERISA.(2) In
choosing among potential service providers, as well as in monitoring and
deciding whether to retain a service provider, the trustees must objectively
assess the qualifications of the service provider, the quality of the work
product, and the reasonableness of the fees charged in light of the services
provided. Because the contemplated audits may confer a benefit on the
employers of the employees in the plan, the trustees have a duty to ensure
that the plan’s payment for the audits is reasonable in light of the
benefit conferred on the plan. Moreover, to the extent that the payments are
made for the benefit of parties other than the plan’s participants or
beneficiaries, or involve services for which a plan sponsor or other entity
could reasonably be expected to bear the cost of in the normal course of
such entity’s business, the use of plan assets to make such payments would
not be a reasonable expense of administering the plan.(3)
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Similarly, the trustees must consider whether to
purchase the linked insurance for the plan in light of all the relevant
facts and circumstances and in accordance with their responsibilities as
fiduciaries.(4) In this regard,
section 410(b)(1) of ERISA expressly allows, but does not require, a plan
to purchase insurance for its fiduciaries or for itself to cover liability
or losses occurring by reason of the act or omission of a fiduciary,
provided that such insurance permits recourse by the insurer against the
fiduciary in the case of a breach of a fiduciary obligation by the
fiduciary.(5)
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Finally, although you have not asked whether the payment of sanctions or
penalties in connection with the settlement of disqualification matters with
the IRS would constitute a reasonable administrative expense of the plan
under Title I of ERISA, we believe that this issue is relevant to your
request. The Department has expressed the view, in a context in which
penalties under section 6652 of the Code were being imposed on a plan
administrator as a personal liability, that payment of such penalties would
not constitute a reasonable expense of administering the plan for purposes
of ERISA sections 403 and 404 to the extent they are a personal liability of
someone other than the plan. See letter to Mark Sokolsky from John J. Canary
(February 23, 1996). If a plan-disqualifying defect were not caused by a
breach of fiduciary duty, the plan could only pay for any resulting
sanctions or penalties to the extent that such payment would constitute a
reasonable expense of the plan. See Advisory Opinion 97-03A (January 23,
1997).
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I hope this information is helpful to you.
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Sincerely,
Susan G. Lahne
Acting Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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You indicate that the compliance
audits would relate solely to the management of tax-qualified,
multiemployer pension plans and not to decisions relating to the
establishment, design, or termination of such plans.
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In this regard, the Department has
acknowledged that fiduciaries may rely on information, data,
statistics or analysis furnished by persons performing ministerial
functions for the plan, provided that they have exercised prudence in
the selection and retention of such persons. See 29 C.F.R. §
2509.75-8 (Q-11).
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Letter to David Alter and Mark Hess
from Bette Briggs (September 10, 1996); Letter to Kirk F. Maldonado
from Elliot I. Daniels (March 2, 1987). See also DOL Advisory Opinion
97-03A (January 23, 1997).
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See Letter to Herbert New from Ivan
Strasfeld (August 4, 1988) (plan fiduciaries must act prudently and
solely in the interest of participants and beneficiaries when causing
the plan to purchase insurance).
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See DOL Advisory Opinion 76-03
(March 17, 1976).
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