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Michael A. Crabtree, Esq.
Central Pension Fund of the International Union of
Operating Engineers and Participating Employers
4115 Chesapeake Street, NW
Washington, DC 20016-4665
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2002-08A
ERISA Sec. 404(a) & 408(b)(2)
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Dear Mr. Crabtree: |
This is in response to your request for an advisory opinion
on behalf of the Central Pension Fund of the International Union of Operating
Engineers and Participating Employers (the “Fund”) concerning the
application of the provisions of the Employee Retirement Income Security Act of
1974, as amended (ERISA). Specifically, you have requested the views of
the Department as to whether inclusion of certain indemnification and
hold-harmless provisions in a plan’s service provider contract would violate
the fiduciary provisions of ERISA. |
You represent that an actuarial firm, in connection
with discussions relating to the renewal of its contract to provide actuarial
services to the Fund, advised that it was requiring all new engagement letters
to contain, among other things, “limitation of liability” and
“indemnification” provisions. These provisions, in effect, would
require the Fund to agree not to recover from the actuarial firm an amount in
excess of the greater of $250,000 or one year’s fee for any damage caused to
the Fund “regardless of the cause of action,” and to indemnify and hold the
actuarial firm harmless for any amount exceeding the same limits “from any
third party claim or liability” arising from, or in connection with, the
firm’s services to the Fund. The Fund’s insurer has informed the Fund
that its fiduciary liability policy would not cover the Fund’s losses if the
Fund suffered losses in excess of $250,000 as a result of the actuarial firm’s
actions that were not recovered because of the proposed limitation of liability
and indemnification provisions. The insurer explained that the policy is
not designed to cover professional liability exposures normally associated with
Actuarial Errors and Omissions coverage. |
Although the Fund has decided not to retain the actuarial
firm, opting instead for a firm that required no specific limitation of
liability or indemnification provision, limitation of liability and
indemnification provisions may be becoming increasingly popular with actuarial
firms according to press and other reports. Given the current and future
issues presented to fiduciaries with respect to the engagement of service
providers with contractual limitations of liability or indemnification
provisions, you have requested guidance from the Department concerning the
permissibility of such provisions under ERISA. |
Section 404(a)(1) of ERISA requires, among other things,
that a fiduciary discharge his or her duties with respect to a plan solely in
the interest of the participants and beneficiaries and 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. The prohibited transaction provisions state, in
section 406(a)(1)(C) and (D) of ERISA, that a fiduciary with respect to an
employee benefit plan shall not cause the plan to engage in a transaction if he
or she knows or should know that such transaction constitutes a direct or
indirect furnishing of services between the plan and a party in interest with
respect to the plan, or transfer to, or use by or for the benefit of, a party in
interest, of any assets of the plan. Section 408(b)(2) of ERISA provides a
statutory exemption from the prohibitions of section 406(a) for contracting or
making reasonable arrangements with a party in interest, including a fiduciary,
for office space, or legal, accounting, or other services necessary for the
establishment or operation of the plan, if no more than reasonable compensation
is paid for such services. |
With regard to the selection of service providers under
ERISA, the Department has previously indicated that the responsible plan
fiduciary must engage in an objective process designed to elicit information
necessary to assess the qualifications of the provider, the quality of services
offered, and the reasonableness of the fees charged in light of the services
provided. In addition, such process should be designed to avoid
self-dealing, conflicts of interest or other improper influence. What
constitutes an appropriate method of selecting a service provider, however, will
depend upon the particular facts and circumstances. Soliciting bids among
service providers is a means by which a fiduciary can obtain the necessary
information relevant to the decision-making process, including information about
contractual provisions such as those identified in your letter relating to
limitations of liability and indemnification. |
The Department does not believe that, in and of
themselves, most limitation of liability and indemnification provisions in a
service provider contract are either per se imprudent under ERISA section
404(a)(1)(B) or per se unreasonable under ERISA section 408(b)(2). The
Department believes, however, that provisions that purport to apply to fraud or
willful misconduct by the service provider are void as against public policy and
that it would not be prudent or reasonable to agree to such provisions.
Other limitations of liability and indemnification provisions, applying to
negligence and unintentional malpractice, may be consistent with sections
404(a)(1) and 408(b)(2) of ERISA when considered in connection with the
reasonableness of the arrangement as a whole and the potential risks to
participants and beneficiaries. At a minimum, compliance with these
standards would require that a fiduciary assess the plan’s ability to obtain
comparable services at comparable costs either from service providers without
having to agree to such provisions, or from service providers who have
provisions that provide greater protection to the plan. |
In the Department’s view, compliance with ERISA’s
fiduciary provisions, including section 408(b)(2), also would require that a
fiduciary assess the potential risk of loss and costs to the plan that might
result from a service provider’s act or omission subject to a proposed
limitation of liability or indemnification provision. In
making such an assessment, a fiduciary should consider the potential for, and
outside limits of, such a loss, as well as any additional actions that may be
available to the plan to minimize such a loss. |
This letter constitutes an advisory opinion under ERISA
Procedure 76-1. Accordingly, this letter is issued subject to the
provisions of the procedure, including section 10 relating to the effect of
advisory opinions. |
Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations |
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