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Employee Benefits Security Administration

Information Letter

July 28, 1998

Mr. Gary E. Henderson
President, Qualified Plan Services, L.L.C.
1100 Chase Square
Rochester, New York 14604-1999

Dear Mr. Henderson:

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.

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.

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.

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.

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.

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.

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)

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)

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).

I hope this information is helpful to you.

Sincerely,
Susan G. Lahne
Acting Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations


Footnotes

  1. 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.

  2. 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).

  3. 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).

  4. 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).

  5. See DOL Advisory Opinion 76-03 (March 17, 1976).