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Important: This handbook focuses on those private sector pension plans where
someone, such as a trustee or investment manager, is responsible for
investing the plan's assets. Although many of the same rules apply, special
rules can apply to employee stock ownership plans and to pension plans where
participants personally direct investment of assets in their individual plan
accounts.
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On
This Page |
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It is only a quick reference tool. Thus, it is not a complete description or
legal interpretation of all the ERISA rules. For further information, you
should contact the nearest office of the U.S. Department of Labor, Employee Benefits Security Administration
listed at the end of this handbook. You
can also write us at:
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U.S. Department of Labor
Employee Benefits Security Administration
200 Constitution Avenue, NW, Suite N-5625
Washington, DC 20210
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If you kept your life savings in a cookie jar, you would need a very large
watchdog to keep the money safe.
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Like millions of Americans, a large part of your savings
may be in a pension fund sponsored by a private corporation or union. The
task of protecting that money may require policing your plan as well as
those who operate it and make investments on its behalf. You have to be your
own watchdog.
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"Protect Your Pension" was written for workers
and retirees who are participating in or receiving benefits from company or
union pension plans. The information in this handbook is based on a federal
law called the Employee Retirement Income Security Act, known as ERISA. It
focuses on that part of ERISA that deals with the duties of persons or
organizations with responsibility for managing or administering pension
plans or investing their assets.
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This handbook will tell you how to find out who is
managing your pension money and will explain the rules that pension managers
must follow. It also will help you learn whether those rules are being
broken and what to do if you think there are problems. It also provides
basic guidance on how to read the annual financial reports that ERISA
requires private sector pension plans to file with the federal government.
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Another valuable source of plan information is the
summary of the plan, known as the summary plan description (SPD). It tells
when you begin to participate in the plan, how service and benefits are
calculated, when your benefits become vested, when you will receive payment
and in what form, and how to file a claim for benefits. The plan
administrator must automatically provide you with a copy of the SPD when you
become a participant of the plan and give you notice of any major changes in
the plan adopted since your receipt of the SPD.
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You also can make a written request to the plan
administrator every twelve months for a copy of your individual benefit
statement. The statement describes your total accrued and vested benefits in
the plan. Plans to which more than one unaffiliated employer contributes are
not currently required to furnish this statement.
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A handy reference chart ("Sources of Plan
Information") about plan documents and how to obtain them has been
included on page 38 of this booklet.
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You often are in the best position to be a watchdog over your pension plan
and to catch problems early. Given the large number of private sector
pension plans, the federal government can review only a small percentage of
these plans each year.
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While most plans are managed and invested responsibly,
abuses do occur. Being an informed watchdog over the operations and
investments of your pension plan can help prevent and correct abuses.
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You should care about your plan's investment practices
because the amount of your pension benefit can depend on how well your
pension money has been managed over the years.
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In some plans, investments have a direct impact on the
amount of the worker's pension. In these plans, often called defined
contribution plans, a separate account is set up in the plan for each
person. These individual accounts are periodically credited with their share
of employer contributions and the plan's investment returns. The allocation
of employer contributions is determined by a formula written into the plan.
The amount contributed and the performance of the plan's investments
determines the amount of benefits paid at retirement. In these plans, fund
mismanagement could mean the loss of some, or even all, of your benefits.
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In other plans, the employer promises to pay participants
a certain amount in benefits upon retirement. In these plans, often called defined
benefit plans, the amount of the benefit, rather than the amount of the
contribution, is determined by a formula written into the plan. The formula
may calculate benefits as a percent of annual wages, it may provide for a
flat monthly payment, or it may use another measure. In these plans, pension
benefits do not vary depending on the amount contributed and the plan's
investment performance. The employer is obligated to contribute enough to
pay for the promised benefits. Even in this type of plan, however, poor
management could lead to reduction of your benefits.
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Federal pension insurance provides some protection to
those participating in defined benefit plans if their plans are ended
without enough assets to pay for all the promised benefits. Not all pension
plans are covered by this federal insurance program. Even for covered plans,
the insurance does not guarantee that participants and beneficiaries will
receive all of the promised benefits.
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Being a watchdog over your pension plan starts with knowing the rules that
the people managing the pension plan and investing its assets must follow.
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These rules are really a matter of common sense. If you
give your money to others to invest for you, you expect them to look out for
your interests, not their own; to pay only reasonable amounts for services
necessary to properly run the plan; to avoid large losses by spreading the
money among several different investments; and to invest the money wisely
and carefully.
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Rule 1: The Money Must Be Invested In Your Interest -
Your pension money is supposed to be working for you and everybody else
covered by the plan - not for people who set up, run or provide services to
the plan. The people managing the fund are not allowed to use the money for
themselves, for their relatives or for their business. They must make
investments solely in the interest of the people participating in and
receiving benefits from the plan, and not to further the interests of your
employer or union.
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The trustees of a Florida utility company broke this
rule when they made eight loans totaling almost $400,000 from the pension
fund to the utility company and to several company executives who managed
the fund.
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A family-owned liquor company broke the rule when the
owners put money into the pension fund and then lent it back to the
company. The family sold the business for $2.8 million. Immediately after
the sale, the company went bankrupt with only $5,000 left in the pension
fund.
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Rule 2: Money Paid Out As Expenses Must Be Reasonable
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The pension managers are not permitted to spend excessive amounts on
plan business trips, offices, furniture, or other expenses. If they are paid
full-time as union or company employees, it is unlawful for them also to
receive compensation from the plan, except reimbursement of expenses
properly and actually incurred.
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When the managers of a New York pension plan spent
almost three times the plan's average annual income on decorating its
offices, they broke the rule against unreasonable administrative expenses.
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The trustees of a New Jersey union pension plan also
broke this rule when they paid a salaried full-time union official to
manage the pension plan.
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Rule 3: Pension Fund Investments Must Be Diversified -
Pension managers generally are not allowed to put all assets of the
pension plan in a single investment such as one stock or real estate in a
single location. They are generally expected to spread the money among a
variety of investments so there is less chance that one poor investment
could expose the entire pension fund to a risk of large losses.
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When a West Virginia bank managing a local union
pension fund put almost all the money into mortgages in one West Virginia
city, it was guilty of failing to diversify investments.
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The trustees of a Las Vegas pension plan also broke
this rule when they invested most of the pension fund in one Las Vegas
real estate venture.
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Rule 4: The Pension Money Must Be Invested Wisely and
Carefully -
Pension fund managers must use care, skill and prudence to protect your
money. They are supposed to invest the money in a way that reduces the
possibility that the fund could lose large amounts of money. That, of
course, does not mean that the managers should not take any risks at all,
only that the risks should be reasonable.
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The managers of a pension fund broke this rule when
they lent over 50 percent of plan money to a high-risk real estate
developer and then continued making loans to the developer although he had
failed to repay the first loan.
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Another pension plan broke this rule by keeping the
plan's money in passbook savings accounts when it could have gotten a
higher return with other investments which were just as safe.
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Exceptions To The Rules -
There are various legal exceptions to the rules. Many of the exceptions
are part of the same law, called ERISA, which contains the rules that
pension plan managers must follow. The U.S. Department of Labor may also
grant additional exceptions if it finds that the exceptions will not
jeopardize your interests and those of other participants and beneficiaries
of the pension plan.
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All of the exceptions are designed to allow plans to
engage in transactions that will benefit the plan's participants and
beneficiaries. The following are examples of some common exceptions.
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The plan can lend you money if loans are made available
on basically the same terms to everyone covered by the plan. You have to be
charged a reasonable rate of interest and you have to put up something you
own as security for repayment of the loan.
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In some cases, the plan can rent space or contract for
legal, accounting or other services from people connected with the plan, the
company, or a union representing plan members, as long as the amount paid
for the space or service is reasonable.
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Also, an exception allows pension plans to invest up to
10% of the plan's assets in qualifying employer securities (stock and
certain other marketable obligations) of a company whose employees are
covered by the plan or in qualifying real estate leased to such an employer
if certain conditions are satisfied. Certain types of defined contribution
pension plans may legally have even more than 10% of the plan's assets so
invested. Those plans include individual account plans which are profit
sharing plans, stock bonus plans, thrift or saving plans, employee stock
ownership plans, and certain money purchase plans.
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Under federal law your pension plan is required to give you information
about plan investments. The plan must automatically provide you with a
summary of its finances for each year, or a written notice of your right to
receive that summary. The summary is called a summary annual report,
or SAR. In addition, if you ask for it in writing, you must be given a copy
of the full annual report and financial statements that the plan files with
the government. Plans covering 100 or more participants generally must use a
Form 5500 and plans covering less than 100 participants can use a
simpler version called a Form 5500-C/R. The forms usually must be
filed with the government within seven months after the end of the calendar
year or other 12-month period your plan uses for financial reporting
purposes.
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Summary Annual Reports -
If you are in a plan that files a Form 5500, the plan must give you a
summary annual report (SAR) each year.
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Ordinarily one to two pages long, the SAR summarizes
information contained in the plan's more detailed Form 5500 financial
statements, and will give you a sense of how well your pension plan's
investments have performed. For example, it shows:
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Whether the plan's investments have
lost large amounts of money during a year;
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The plan's total administrative
expenses for the year;
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A list of items that can alert you to
questionable financial arrangements with individuals or organizations
closely connected to the plan; and
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If any money loaned by the plan has
not been paid back on time.
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Page
15 shows a copy of the required form for a pension plan SAR issued by the
U.S. Department of Labor. Administrators of pension plans filing a Form 5500
or Form 5500-C are generally required to use this form and must fill in the
blanks with information about their plans.
In the case of an employee benefit plan filing a Form
5500-R, the administrator, in lieu of furnishing the SAR for that year, may:
1) give you a copy of the Form 5500-R filed on behalf of the plan and an
explanatory notice, 2) give you a written notice stating that a copy of the
Form 5500-R will be provided free of charge if you ask for it in writing,
and/or 3) post that written notice for a minimum of 30 days at worksite
locations.
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SARs are typically distributed to workers at their jobs
and mailed to retirees. SARs can also be distributed as a special insert in
a company or union newspaper or magazine.
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If you are in a plan filing a Form 5500-C/R, you
will receive an SAR for those years in which the plan files the Form
5500-C . In general, this will be every three years.
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The SAR every three years, and your plan's response to
Items 13 and 14 on page 2 of the Form 5500-R in other years, will tell you
if the plan has lost money during the year. The SAR and Item 14 of the
Form 5500-R will say how much it cost to run the plan. The SAR, and the
plan's answers to Item 15 of the Form 5500-R, will let you know if the
person running the plan has made any loans to certain types of company
officers, whether there has been any default on certain types of
investment payments owed to the plan, and if a large amount of the plan's
money has gone into a single investment.
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While the SAR can signal potentially troublesome areas,
it is only a summary. You may also want to take a look at the plan's
complete annual report and financial statements. The SAR will tell you how
you can get a copy.
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Annual Reports and Detailed Financial Statements -
Federal law generally requires employee benefit plan administrators to
submit annual reports (the Form 5500 series) with information on the
characteristics and financial operations of the plan. These reports are
filed with the Internal Revenue Service. The IRS processes the reports and
provides copies to the U.S. Department of Labor for use in enforcement and
other program activities and for disclosure to the public.
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For larger plans, the Form 5500 is a six-page government
form with a number of other documents attached. For many plans, these
documents will include an accountant's report, a list of investments and,
for defined benefit plans, a report showing information regarding the
funding status of the plan. In the Form 5500 and the attached documents, you
should be able to find the information you need to "watchdog" your
pension fund.
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If you are in a smaller plan, detailed financial
statements for the plan must be prepared for the plan's first year and
last year, and every third year in between. The detailed annual report for
small plans is the Form 5500-C (the first and last four pages of the
six-page Form 5500-C/R). The plan can file the shorter Form 5500-R instead
of the Form 5500-C in all other years. The Form 5500-R consists of only
the first and second pages of the Form 5500-C/R.
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The Form 5500-R still provides
financial information regarding the plan, but it does not provide all
the details included in the Form 5500-C.
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The Form 5500-C and the Form 5500-R
are separate forms. They were consolidated into a combined Form
5500-C/R package in an effort to reduce administrative burdens on plan
administrators.
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You can ask for your plan's Form 5500, Form 5500-C or Form 5500-R from the
person or organization running your plan, the plan administrator.
Your employer often is the plan administrator. Your request for a form must
be in writing. You may want to send your request by certified mail
"return receipt requested," so you will have a record of when you
made your request and evidence that your request was received by the plan
administrator. You can be charged a reasonable fee to cover the cost of
copying, up to 25 cents per page.
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You have a legal right to a copy of the plan's latest
Form 5500, Form 5500-C or 5500-R. The plan administrator is required to give
you a copy upon receiving your written request. If a plan administrator
refuses to comply with your request for those documents, and the reasons for
the delay are within his or her control, a court may impose a penalty of up
to $100 per day. The Labor Department does not have the authority to impose
this penalty.
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Also, you may want to ask whether the administrator is
willing to give you copies of the forms for several years. That will allow
you to get a complete picture of the pension plan's finances.
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You can also write or call the U.S. Department of Labor's
Employee Benefits Security Administration Public Disclosure Facility for
copies of plan filings. You can get copies of your plan's forms for several
years from the Department. See Sources of Plan Information on page 38
for information on obtaining plan filings.
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Although the money in the pension fund must be used to provide pension
benefits to you and the other plan members, in a typical defined benefit
plan and in some defined contribution plans you have no say over where the
money is invested. All investment decisions are made by one or more plan
trustees or investment managers. These are individuals or organizations
chosen to hold and invest the plan's assets.
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How can you find out how the plan's money is being
invested? First, you should find out who is responsible for managing the
plan's money.
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The person or persons who manage the plan on a day-to-day
basis - the plan administrator - may also be responsible for managing the
plan's investments. The plan administrator may be a company officer or a
committee of company officials. Plans set up under a contract between a
union and a group of employers often are run by a board of trustees made up
of union and company officials. You will find the name of your plan
administrator in Item 2 on page 1 of the Form 5500. (All references in
this handbook are to the 1995 versions of the Form 5500 and 5500-C/R. The
forms are revised occasionally. Item numbers may vary depending on the year
of the form.)
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If someone other than the plan administrator is in charge
of investing the plan money, such as a bank, insurance company or investment
management firm, these institutions or persons could be listed on the
Schedule C attached to the Form 5500. Many large plans use a number of
different investment managers.
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Smaller
plans are required to include the name of the plan administrator in Item 2
on page 1 of the Form 5500-C and 5500-R. Other persons or institutions with
responsibility for managing the plan money are not listed in Form 5500-C/Rs.
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Note: If your plan money is "pooled" with money
from other pension plans in an insurance company or bank, detailed financial
information should be filed by the insurance company or bank with the Labor
Department, if it is not included with the Form 5500 or Form 5500-C/R. As
with other 5500 series forms filed by your plan, you can also request this
information from the EBSA Public Disclosure Facility for a copying fee of 15
cents per page.
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After you have found out who the money managers are,
the second step is to check on how your pension plan's assets are being
invested. The law says that plan administrators generally must report on their
plan's Form 5500 whether the plan was involved in any transactions with
parties in interest. Parties in interest are people or organizations who
have close ties to the plan, such as your employer or union, people employed
by your employer or union, trustees of the plan, the plan administrator, or
relatives of those people.
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The reason these transactions must be reported is that
transactions involving the plan and parties in interest are generally not
legal unless expressly permitted by law or by a specific Labor Department
ruling. Examples of lawful "party in interest" transactions are:
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Lease arrangements between a pension
plan and a company for a reasonable amount of rent
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Investment of less than 10 percent of
plan money in publicly-traded stock issued by the company
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Loans to plan participants if the
loans are available to all plan members on basically the same terms.
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If the arrangement is legal it is called an
"exempt" party-in-interest transaction.
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You can find out if there are any investments that the
accountant for the plan or the plan administrator consider to be unlawful,
or "nonexempt," by looking at Items 27e and f on page 4 of the
Form 5500. If the plan has checked "yes" for these items, the plan
must attach detailed information about the transactions to the Form 5500.
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If
"nonexempt transactions with parties in interest" are reported on
your plan's Form 5500, you should immediately bring this information to the
attention of the Labor Department field office for your area.
If information about questionable financial arrangements
is not flagged in Items 27e and f, you may want to check the investments
that the plan administrator says are legal party in interest transactions.
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The first place to look is at Items 27b and c on page 4
of the Form 5500 to see if there are any loans and leases in default.
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If
the "yes" box is marked for any of these items there should be a
list of these investments attached to the Form 5500, and any loans or leases
in default involving parties in interest should be marked with an
asterisk(*).
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Second, check Item 27a which asks about "assets held
for investment." If Item 27a is marked "yes," the plan must
attach a list of all the stocks, bonds, real estate, loans, leases, and
other property that were owned by (or owed to) the plan on the last day of
the plan year. There should be an asterisk next to any of these investments
that involve a party in interest.
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Finally, there may also be other lists of investments
attached to the Form 5500. These would show whether certain investments made
during the year were sold or paid back before the end of the year and
whether there were any transactions involving more than 5 percent of the
plan's assets. There is no requirement that party in interest transactions
be flagged with asterisks on those lists, so you will have to review them
carefully.
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For smaller plans, information about party in interest
transactions is in Form 5500-R, Items 15d, e, f and j (page 2) and Form
5500-C, Items 26d, e, f and j (page 5). Items 15d and e and Items 26d and
e ask whether there were any sales, exchange, or lease of property, or
loans by the plan to the company, a plan trustee or other fiduciary, or
certain company officers or owners. Items 15f and 26f ask if the plan
acquired or held any employer security or employer real property. Items
15j and 26j ask if any plan fiduciary had a 10% financial interest in any
entity providing services to the plan or received anything of value from
such a party. The forms do not ask plan administrators to say whether the
transactions are legal or illegal and does not require them to attach a
listing of these transactions.
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