Dear Mr. Myers:
This is in response to your request for an advisory
opinion on behalf of JPMorgan Chase Bank, N.A. (JPMorgan) regarding the
application of the fiduciary responsibility provisions of Title I of the
Employee Retirement Income Security Act of 1974, as amended (ERISA).
Specifically you have inquired whether a fiduciary of a defined benefit
plan may, consistent with the requirements of section 404 of ERISA,
consider the liability obligations of the plan and the risks associated
with such liability obligations in determining a prudent investment
strategy for the plan.
You represent that JPMorgan, as a plan fiduciary,
proposes to “risk manage” the assets of defined benefit plans by
better matching the risks of a plan’s investment portfolio assets with
the risks associated with its benefit liabilities, with a goal toward
reducing the likelihood that liabilities will rise at a time when the
assets decline. Defined benefit plan liabilities are determined by a
number of factors, most significantly the demography of the participant
population (participants’ number of years of service and/or expected
length of time for payment of retirement benefits) and the interest rates
used to calculate the present value of the plan’s obligations for
funding and accounting purposes.
According to your letter, these liabilities most
closely correlate with fixed-income assets, so that one approach for risk
managing assets would be to invest directly in a portfolio of fixed-income
securities with a duration of the plan’s benefit obligations. However,
you note that there may be aspects of a plan’s obligations that
correlate more closely with other types of investments, and it may not be
possible to match liabilities precisely with fixed-income securities due
to limitations in the fixed-income market. As a result, you indicate that
a variety of approaches may be used in practice, depending on the facts
and circumstances of the particular plan.
In developing an asset allocation that better matches
the risk and duration characteristics of a plan’s benefit liabilities,
you explain that the focus of JPMorgan’s services would be on reducing
the risk of underfunding to the plan and its participants and
beneficiaries by reducing volatility in funding levels. In this regard,
you note that there may be incidental benefits to the plan sponsor from
maintaining more consistent funding levels, such as reduced volatility on
the sponsor’s financial statements and reduced minimum contribution
obligations. However, you also note that the principal benefit of
decreased volatility would be the reduced need for the plan to rely on the
plan sponsor to meet its funding obligations, protecting the plan
participants and beneficiaries in the event of the sponsor’s insolvency.
Taking into account the foregoing, you have requested
the views of the Department on whether a fiduciary of a defined benefit
plan may, consistent with the requirements of section 404 of ERISA,
consider the liability obligations of the plan and the risks associated
with such liability obligations in determining a prudent investment
strategy for the plan.
Sections 403(c) and 404(a)(1)(A) of ERISA require plan
fiduciaries to discharge their duties with respect to a plan solely in the
interest of plan participants and beneficiaries and for the exclusive
purpose of providing benefits to participants and beneficiaries and
defraying the reasonable expenses of administering the plan. Section
404(a)(1)(B) of ERISA requires plan fiduciaries to act with the care,
skill, prudence and diligence under the circumstances then prevailing that
a prudent man acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character with like
aims. These fiduciary standards apply to the selection and monitoring of
plan investments, including plan investments made pursuant to a particular
investment strategy. The frequency and degree of monitoring, will, of
course, depend on the nature of such investments and their role in the
plan’s portfolio.
The general standards of fiduciary conduct contained in
sections 404(a)(1) apply to any investment by a plan covered by Title I,
including investments made pursuant to the described risk management
investment strategy. Accordingly, fiduciaries of the plan must act
prudently, solely in the interest of the plan’s participants and
beneficiaries, and for the exclusive purpose of providing benefits and
defraying reasonable plan administrative costs when deciding whether to
invest in a particular investment or use a particular investment strategy.
With regard to investing plan assets, the Department
has issued a regulation, at 29 CFR 2550.404a-1, interpreting the prudence
requirements of ERISA as they apply to the investment duties of
fiduciaries of employee benefit plans. The regulation provides that the
prudence requirements of section 404(a)(1)(B) are satisfied if (1) the
fiduciary making an investment or engaging in an investment course of
action has given appropriate consideration to those facts and
circumstances that, given the scope of the fiduciary's investment duties,
the fiduciary knows or should know are relevant, and (2) the fiduciary
acts accordingly. This includes giving appropriate consideration to the
role that the investment or investment course of action plays with respect
to that portion of the plan's investment portfolio within the scope of the
fiduciary's responsibility.
The regulation further specifies the facts and
circumstances that must be given appropriate consideration to include, but
not be limited to, (A) a determination by the fiduciary that the
particular investment or investment course of action is reasonably
designed, as part of the portfolio (or, where applicable, that portion of
the plan portfolio with respect to which the fiduciary has investment
duties) to further the purposes of the plan, taking into consideration the
risk of loss and the opportunity for gain (or other return) associated
with the investment or investment course of action and (B) consideration
of the following factors as they relate to such portion of the portfolio:
(i) the composition of the portfolio with regard to diversification; (ii)
the liquidity and current return of the portfolio relative to the
anticipated cash flow requirement of the plan; and (iii) the projected
return of the portfolio relative to the funding objectives of the plan.
Within the framework of ERISA’s prudence, exclusive
purpose and diversification requirements, the Department believes that
plan fiduciaries have broad discretion in defining investment strategies
appropriate to their plans. In this regard, the Department does not
believe that there is anything in the statute or the regulations that
would limit a plan fiduciary’s ability to take into account the risks
associated with benefit liabilities or how those risks relate to the
portfolio management in designing an investment strategy.
For these reasons, a fiduciary would not, in the view
of the Department, violate their duties under sections 403 and 404 solely
because the fiduciary implements an investment strategy for a plan that
takes into account the liability obligations of the plan and the risks
associated with such liabilities and results in reduced volatility in the
plan’s funding requirements. Whether any particular investment strategy
is prudent with respect to a particular plan will depend on all the facts
and circumstances involved.
This letter constitutes an advisory opinion under ERISA
Procedure 76-1. Accordingly, it is issued 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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