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Employee Benefits Security Administration

Advisory Opinion

August 12, 2003

2003-10A
ERISA Sec. 407(a)(2)

Charles R. Smith
Kirkpatrick & Lockhart LLP
535 Smithfield Street
Pittsburgh, PA 15222-2312

Dear Mr. Smith:

This is in response to your request for an advisory opinion under Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you ask whether the reallocation of employer securities from the account of one plan participating in a master trust to the accounts of other plans participating in the master trust in exchange for interests of those plans in other assets of the same value held in the master trust would constitute an acquisition of employer securities for purposes of section 407(a) of ERISA.

You represent that Crucible Materials Corporation (CMC) created a master trust (the Trust) pursuant to the Crucible Materials Corporation Master Trust Agreement dated October 24, 1986, between CMC and Mellon Bank, NA (the Trustee), as amended (the Trust Agreement). The assets of the following five defined benefit pension plans sponsored by CMC for the benefit of certain of its collectively bargained employees (the Plans) are held by the Trust:

  • Trent Tube Division of Carrollton, Georgia Pension Plan (Plan No. 048)

  • Trent Tube Pension Plan, East Troy, Wisconsin (Plan No. 047)

  • Crucible Compaction Metals Division of Crucible Materials Corporation (Compaction Plan)

  • Crucible Materials Corporation Specialty Metals Division – Syracuse Plan (Plan No. 044)

  • Service Centers Division Retirement Plan for Cleveland Warehouse Employees (Plan No. 046)

The Trust is a master trust that holds the assets of all five Plans. The assets in the Trust currently are commingled for investment purposes. Included in the assets of the Trust are shares of CMC capital stock. You represent that at present the fair market value of the CMC stock allocated within the Trust does not exceed 10 percent of the fair market value of the assets of any of the Plans (or, to the extent they do, any such excess is not the result of an “acquisition” within the meaning of section 407(a)(2) of ERISA, but rather the growth in the fair market value of such securities since the date of acquisition). All of the assets of the Trust, including the employer securities, are allocated among the Plans for funding and record keeping purposes and for purposes of satisfying the liabilities of each Plan.

You further represent that in connection with the collective bargaining process at CMC’s Compaction Metals Division, the union representing the hourly workers has requested that the Compaction Plan be merged into a pension plan maintained by the union for its members. You represent that the union has advised CMC that its pension plan cannot accept the CMC employer securities held by the Compaction Plan in the Trust. In order to accommodate the merger of the two plans, CMC proposed to direct the Trustee to reallocate the assets of the Trust among the Plans, such that the qualifying employer securities are reallocated from the Compaction Plan to the remaining Plans and assets of equal value, other than the qualifying employer securities, are reallocated from the remaining Plans to the Compaction Plan. The fair market value of the assets allocated within the Trust to each Plan will be the same immediately before and after the allocation. However, the reallocation may cause the value of the employer securities held by the plans other than the Compaction Plan to exceed 10 percent of the fair market value of the total assets of the Trust allocated to each of the Plans other than the Compaction Plan. You also note that the reallocation of assets will not result in a change of legal or beneficial ownership of the securities by the Trust, nor will any of the certificates representing the CMC employer securities be canceled or reissued.

You ask whether a reallocation of assets, including employer securities, held in the accounts of various plans participating in a master trust, constitutes an acquisition for purposes of section 407(a) of ERISA.

Section 407(a)(1) of ERISA provides that a plan may not acquire or hold any employer security that is not a qualifying employer security. In relevant part, section 407(d)(5)(A) of ERISA defines the term qualifying employer security as an employer security that is stock.(1)  Section 407(a)(2) provides further that a plan that is not an eligible individual account plan as defined in section 407(d)(3) of ERISA, such as a defined benefit plan, may not acquire any qualifying employer security or qualifying employer real property, if immediately after such acquisition the aggregate fair market value of employer securities and employer real property held by the plan exceeds 10 percent of the fair market value of the assets of the plan. Section 406(a)(1)(E) provides that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect acquisition, on behalf of the plan, of any employer security or employer real property in violation of section 407(a).

For purposes of section 407(a) of ERISA, an acquisition by a plan of qualifying employer securities or qualifying employer real property shall include, but not be limited to, an acquisition by purchase, by the exchange of plan assets, by the exercise of warrants or rights, by the conversion of a security (except any acquisition pursuant to a conversion exempt under section 408(b)(7) of ERISA), by default of a loan where the qualifying employer security or qualifying employer real property was security for the loan, or by the contribution of such securities or real property to the plan. 29 CFR 2550.407a-2(b).

In our view, a reallocation of one plan’s fractional interest in qualifying employer securities held in a master trust to the remaining plans participating in the master trust with a corresponding reallocation to the first plan from the remaining plans of an interest in the other master trust assets of the same value as the first plan’s fractional interest in the qualifying employer securities is an acquisition of qualifying employer securities by the remaining plans by an exchange of plan assets within the meaning of section 407(a)(2) of ERISA. To the extent that, immediately after the reallocation, more than 10 percent of the value of the master trust assets in which any of the remaining plans held an interest were in qualifying employer securities, the transaction would violate sections 407(a)(1) and 406(a)(1)(E) of ERISA.

In addition, to the extent that a common fiduciary represents all plans involved in the transaction, the exchange of plan assets among the plans participating in the master trust would violate section 406(b)(2) of ERISA, which provides that a fiduciary shall not in his or her individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries. We note further that the statutory exemption provided by section 408(e) of ERISA from the restrictions of section 406 and 407 of ERISA for the acquisition of qualifying employer securities is conditioned upon compliance with the requirements of section 407(a) in the case of plans that are not eligible individual account plans, and so would not provide relief here.

Finally, we note that section 404 of ERISA requires fiduciaries to act prudently and for the exclusive purpose of providing benefits and defraying reasonable expenses of the plan.

This letter constitutes an advisory opinion under ERISA Procedure 76﷓1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions.

Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations

Footnotes

  1. For purposes of this letter only, we assume that the CMC capitol stock constitutes qualifying employer securities within the meaning of section 407(d)(5).