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Employee Benefits Security Administration

EBSA Federal Register Notice

Grant of Individual Exemption To Amend Prohibited Transaction Exemption (PTE) 95-31 Involving the Financial Institutions Retirement Fund (the Fund) and the Financial Institutions Thrift Plan (the Thrift Plan) Located in White Plains, NY [10/26/2006]

[PDF Version]

Volume 71, Number 207, Page 62612-62615

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Prohibited Transaction Exemption 2006-15; Exemption Application No. D-
11039]

 
Grant of Individual Exemption To Amend Prohibited Transaction 
Exemption (PTE) 95-31 Involving the Financial Institutions Retirement 
Fund (the Fund) and the Financial Institutions Thrift Plan (the Thrift 
Plan) Located in White Plains, NY

AGENCY: Employee Benefits Security Administration, U.S. Department of 
Labor.

ACTION: Grant of Individual Exemption to Amend PTE 95-31.

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SUMMARY: This document contains a final exemption that amends PTE 95-31 
(60 FR 18619, April 12, 1995), an exemption granted to the Fund and the 
Thrift Plan. PTE 95-31 involves the provision of certain services, and 
the receipt of compensation for such services, by Pentegra Services, 
Inc. (Pentegra), a wholly-owned, for-profit subsidiary corporation of 
the Fund. These transactions are described in a notice of pendancy that 
was published in the Federal Register on July 3, 2002 (67 FR 44643).

EFFECTIVE DATE: This exemption is effective October 26, 2006.

FOR FURTHER INFORMATION CONTACT: Christopher Motta, Office of Exemption 
Determinations, Employee Benefits Security Administration, U.S. 
Department of Labor, telephone (202) 693-8544. (This is not a toll-free 
number.)

SUPPLEMENTARY INFORMATION: PTE 95-31 provides an exemption from certain 
prohibited transaction restrictions of section 406(a) and 406(b)(1) and 
(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA or 
the Act) and from the sanctions resulting from the application of 
section 4975 of the Internal Revenue Code of 1986 (the Code), as 
amended, by reason of section 4975(c)(1)(A) through (E) of the Code. 
Specifically, PTE 95-31 permits the provision of certain services, and 
the receipt of compensation for such services, by Pentegra to: 
Employers (the Employers) that participate in the Fund and the Thrift 
Plan; and employee benefit plans (the Plans) sponsored by such 
Employers. The exemption contained herein expands the scope of PTE 95-
31 by permitting the provision of certain trust services, and the 
receipt of compensation for such services, by Trustco (a wholly-owned, 
for-profit subsidiary corporation of the Fund that will provide 
directed, non-discretionary trust services) to the Plans, the 
Employers, the Thrift Plan, and individual retirement accounts (the 
IRAs) established by certain employees, officers, directors and/or 
shareholders of the Employers (the Individuals). In addition, the 
exemption permits the provision of certain services by Pentegra to the 
Thrift Plan and the IRAs; and the receipt of compensation by Pentegra 
in connection therewith.
    This individual exemption to amend PTE 95-31 was requested in an 
application filed on behalf of the Fund and the Thrift Plan (together, 
the Applicants) pursuant to section 408(a) of the Act and section 
4975(c)(2) of the Code, and in accordance with the procedures set forth 
in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10, 1990).\1\ The 
notice of proposed amendment gave interested persons an opportunity to 
submit written comments or requests for a public hearing on the 
proposed amendment to the Department. The Department received 7 
comments and no written requests for a public hearing. The Applicants 
responded to these comments in a letter received by the Department on 
February 19, 2004. Ernst & Young LLP, an independent fiduciary as 
discussed in further detail below, submitted a letter received by the 
Department on February 9, 2006.
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    \1\ Section 102 of the Reorganization Plan No. 4 of 1978 (43 FR 
44713, October 17, 1978, 5 U.S.C. App 1 [1995]) generally 
transferred the authority of the Secretary of the Treasury to issue 
administrative exemptions under section 4975 of the Code to the 
Secretary of Labor.
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Discussion of the Comments Received

    Several of the commenters expressed general concern that the 
proposed exemption does not contain sufficient safeguards to protect 
the Fund. In response, the Applicants state that numerous safeguards 
will be in place to protect the Fund with regard to both the creation 
and operation of Trustco. In this regard, the Applicants represent that 
the establishment and operation of Trustco will be overseen by: The 
Office of the Comptroller of the Currency (the OCC), an independent 
fiduciary, an independent auditor, and the Fund's board of trustees. 
The Applicants state that, before granting trust status to Trustco, the 
OCC must determine that Trustco can reasonably be expected to achieve 
and maintain profitability, and operate in a safe and sound manner. To 
the extent trust status is granted to Trustco, the OCC will thereafter 
periodically examine, among other things, the trust company's 
management, operations, internal controls, audits, earnings, asset 
management and compliance with applicable laws and regulations.
    The Applicants state that the establishment and operation of 
Trustco will be further overseen by an independent fiduciary 
(currently, Ernst & Young LLP). In this regard, the independent 
fiduciary will review the services that will be provided by Trustco, 
and, if the services are reasonable and appropriate for the trust 
company, give an express approval for such services. The independent 
fiduciary will also review the provision of trust services by Trustco 
to ensure that the terms contained therein reflect terms at least as 
favorable to Trustco and the Retirement Fund. Thereafter, the 
independent fiduciary must perform periodic reviews to ensure that the 
services being provided by Trustco remain appropriate for Pentegra and 
Trustco.
    The Applicants additionally state that Trustco's financial 
statements will be audited each year by an independent certified public 
accountant, and such audited statements will be reviewed by the 
independent fiduciary.
    The Applicants represent also that the Trustco board will be 
independent from the Pentegra and Thrift Plan boards (as described in 
further detail below). The Applicants state that, at least once a year, 
the Trustco board of directors will provide a written report to the 
Fund Board, describing in detail: the services provided by Trustco, the 
fees received for such services, and an estimate of the fees the trust 
company expects to receive the following year.
    A commenter requested specific information regarding: (1) Pentegra 
clients that have requested the creation of Trustco; (2) Pentegra's 
stand-alone expenses, and the percentage that such

[[Page 62613]]

expenses will increase if Trustco is established; (3) the revenue 
streams that will result from the creation of Trustco; and (4) the 
return on investment that the creation of Trustco will provide to the 
Fund.
    With regard to (1) above, the Applicants represent that certain 
employers that receive services from Pentegra have asked Pentegra to 
provide related trust services. Specifically, sponsors of qualified and 
nonqualified plans that receive recordkeeping services from Pentegra 
have asked whether Pentegra can serve as trustee with respect to such 
plans. The Applicants represent also that certain Pentegra clients have 
indicated that they would prefer to have all of their services, 
including trust services, provided by one entity. With regard to (2) 
above, the Applicants state that preliminary financial projections for 
Trustco indicate that Trusto will incur expenses of $866,500 in year 
one. If 2004 had been the first year of the existence of Trustco, the 
projected expenses of $866,500 would represent a 29.5% increase over 
Pentegra's 2004 budgeted stand-alone expenses of $2,942,388. With 
regard to (3) above, the Applicants state that Trustco anticipates 
charging an asset-based fee of four basis points for 401(k) plan trust 
services. According to the Applicants, this is the same fee that is 
charged by trust companies to plans that receive non-trust services 
from Pentegra. With respect to trust services provided to employee 
stock ownership plans (ESOPs), the Applicants state that Trustco 
anticipates charging $7,000 per plan. According to the Applicants, this 
is the same fee charged by trust companies to ESOPs that receive non-
trust services from Pentegra. With regard to (4) above, the Applicants 
anticipate that the creation of Trustco will result in the following 
expenses in years One through Five, respectively: $866,500; $1,057,825; 
$1,188,466; $1,327,115 and $1,474,429. The Applicants further 
anticipate that the creation of Trustco will result in the following 
revenue in years one through five, respectively: $869,729; $1,085,667; 
$1,306,877; $1,533,609 and $1,766,124. Accordingly, the Applicants 
expect that Trustco will be profitable from the first year of its 
existence onward. Given the expected capital investment of $2 million 
by Pentegra, the expected returns on investment regarding the proposed 
trust company are: 0.2% for Year One; 1.4% for Year Two; 5.9% for Year 
Three; 10.3% for Year Four; and 14.6% for Year Five.
    Several commenters questioned the necessity of the Fund's proposed 
creation of Trustco. These commenters expressed concern that Trustco 
might not be an appropriate investment for the Fund. In response, the 
Applicants state that the following factors were relevant to the Fund's 
decision to create Trustco: (1) Employers currently receiving services 
from Pentegra have asked Pentegra to provide related trust services; 
and (2) the ``market'' for defined benefit pension plans is stagnant, 
at best. The Applicants state that, given these factors, the creation 
of Trustco is necessary since it will enable Pentegra, a Fund asset, to 
retain existing clients and attract new ones in a shrinking market. The 
Applicants state further that the creation of Trustco is appropriate 
since it will enable the Fund to ``unlock'' the employee benefit plan-
expertise contained in Pentegra and create greater economies of scale 
with respect to the costs of administering the Fund.
    Commenters expressed further concern regarding the impact the 
creation of Trustco would have on benefits provided under the Fund. In 
response, the Applicants represent that the Fund does not permit the 
reduction of accrued benefits, regardless of any investments made by 
the Fund. The Applicants state that any expenses incurred in connection 
with the formation of Trustco will not result in a reduction of 
benefits accrued by participants in the Fund.
    Another commenter inquired the following: (1) How, and in what 
amounts, would Trustco provide value to the participants and 
beneficiaries of the Fund; (2) whether Trustco is sufficiently separate 
from the Fund and Pentegra so as not to create a significant risk or 
liability to Pentegra, the Fund, the Thrift Plan, and affected 
participants and beneficiaries; (3) what is the source and amount of 
Trustco's initial capitalization; (4) whether Trustco will be staffed 
with competent, experienced staff and have sufficient bonding or 
insurance to mitigate liability; and (5) what is the expected timeframe 
for Trustco to become profitable.
    With regard to (1) above, the Applicants state that the creation of 
Trustco would benefit the Fund by permitting Pentegra to use existing 
resources/skills to retain clients and attract new ones. The Applicants 
state further that the creation of Trustco would enable the Fund to 
further diversify its portfolio and create new products and services, 
the benefits of which would inure to the Fund's participants. The 
Applicants represent that preliminary financial projections for Trustco 
project that net income will increase from $3,229 in Year One to 
$291,694 in Year Five.
    With regard to (2) above, the Applicants state that the Trustco 
board of directors will be structured to be independent from the 
Pentegra and Fund boards of directors. Any member of the Fund board who 
is also a member of the Trustco board will abstain from any discussions 
or deliberations undertaken by the respective boards of directors with 
respect to any service or lease agreements between the Fund and 
Trustco. The Applicants represent also that Trustco will be subject to 
a limited amount of liability since Trustco will provide only directed, 
nondiscretionary trust services and will not have any investment 
discretion with respect to the assets being held in trust. 
Additionally, Trustco will not engage in any securities lending 
transactions and/or provide any cash management services.
    With regard to (3) above, the Applicants state that the Fund will 
provide the trust company's initial capitalization of $2,000,000, an 
amount that is consistent with OCC requirements. The Applicants 
anticipate that, on an ongoing basis, no more than one-half of one 
percent of the Fund's assets will be invested in Trustco.
    With regard to (4) above, the Applicants represent that Trustco 
will be staffed with competent, experienced employees, at least one of 
which will be a Trustco officer who will be fully dedicated to 
overseeing the company's day-to-day operations. The Applicants state 
that the OCC will carefully evaluate the credentials of such officer 
prior to the establishment of Trustco as a trust company. The 
Applicants state further that Trustco will have the necessary insurance 
to comply with any applicable laws and/or regulations.
    With regard to (5) above, the Applicants represent that preliminary 
financial projections (described above) indicate that Trustco will be 
profitable in its initial and subsequent years of operation.
    Another commenter questioned: (1) Whether it would be more 
appropriate for the Thrift Plan, and not the Fund, to own a profit-
making enterprise such as Trustco; and (2) whether a business plan has 
been developed by Pentegra for Trustco.
    With regard to (1) above, the Applicants state that the Fund may 
invest a portion of its assets in a trust company as long as such an 
investment is prudent, in the best interests of the participants and 
beneficiaries of the Fund, and supports the primary objective of the 
Fund's investment program of meeting/beating its

[[Page 62614]]

liabilities. In contrast, the Thrift Plan is a tax-qualified multiple 
employer defined contribution plan and, therefore, participants in the 
Thrift Plan determine how to invest their accounts (within the array of 
investment options offered under the Thrift Plan). The Applicants 
represent that there is no opportunity for the Thrift Plan to more 
aggressively pursue a return on investments through fee-based services 
because the assets of the Thrift Plan are fully allocated to the 
accounts of the participants who control the investments.
    With regard to (2) above, the Applicants represent that before 
Trustco can be created, a formal business plan must be submitted to, 
and approved by, the OCC and the Fund Board of Directors. The 
Applicants represent that waiting to develop a formal business plan 
until after the proposed exemption is granted precludes the possibility 
that the Fund will pay an unnecessary and costly expense (i.e., in the 
event the Department did not grant the proposed exemption).\2\
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    \2\ A copy of the preliminary financial projections provided by 
Pentegra to the Department of Labor for the first five years of 
Trustco's existence is on file with the Department under D-11039.
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    As noted above, the Department received a letter from Ernst & Young 
on February 9, 2006. In the letter, Ernst & Young states that it 
reviewed the application (D-11039) for this exemption submitted by the 
Applicants to the Department as well as the comments submitted by 
Retirement Fund participants. Ernst & Young states further that the 
rationale expressed by the Applicants for providing trust services is 
consistent with the provision of services Pentegra currently provides. 
Ernst & Young acknowledges that it will review whether the provision of 
trust services by Trustco reflect terms that are at least as favorable 
to Trustco and the Retirement Fund as the terms generally available in 
arm's length transactions between Trustco and employers which do not 
participate in the Retirement Fund. Ernst & Young states that it is 
reasonable to assume that the contemplated formation of a national 
trust company will be in the interests of the Retirement Fund 
participants and that the OCC's oversight will provide sufficient 
protection.
    After full consideration and review of the entire record, including 
the written comments, the Applicants response, and the independent 
fiduciary's statements, the Department has determined to grant the 
individual exemption to amend 95-31, as proposed. The comments, the 
Applicants' response, and the independent fiduciary's letter have been 
included as part of the public record of the exemption application. The 
complete application file, including all supplemental submissions 
received by the Department, is available for public inspection in the 
Public Disclosure Room of the Employee Benefits Security 
Administration, Room N-1513, U.S. Department of Labor, 200 Constitution 
Avenue, NW., Washington, DC 20210.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which require, among other things, a fiduciary to 
discharge his or her duties respecting the plan solely in the interest 
of the participants and beneficiaries of the plan and in a prudent 
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it 
affect the requirements of section 401(a) of the Code that the plan 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) The exemption will not extend to transactions prohibited under 
section 406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
    (3) The Department finds that the amended exemption is 
administratively feasible, in the interests of the plan and of its 
participants and beneficiaries, and protective of the rights of 
participants and beneficiaries of the plan;
    (4) This exemption supplements, and is not in derogation of, any 
other provisions of the Act and the Code, including statutory or 
administrative exemptions. Furthermore, the fact that a transaction is 
subject to an administrative or statutory exemption is not dispositive 
of whether the transaction is in fact a prohibited transaction; and
    (5) This exemption is subject to the express condition that the 
facts, representations, and statements made, or referred to, in: PTE 
95-31, the notice of proposed exemption relating to the amendment of 
PTE 95-31, and this grant, accurately describe, where relevant, the 
material terms of the transactions to be consummated pursuant to this 
exemption.

Exemption

Section I. Covered Transactions

    The restrictions of sections 406(a) and 406(b)(1) and (b)(2) of the 
Act and the sanctions resulting from the application of section 4975 of 
the Code, by reason of section 4975(c)(1)(A) through (E) of the Code, 
shall not apply to the provision of certain services, and the receipt 
of compensation for such services, by Pentegra Services, Inc. 
(Pentegra), a wholly-owned, for-profit subsidiary corporation of the 
Fund, and Trustco, a wholly-owned subsidiary corporation of Pentegra 
(collectively, the Service Providers), to: The Thrift Plan; employers 
that participate in the Fund and/or the Thrift Plan (the Employers); 
employee benefit plans sponsored by the Employers (the Plans); and the 
individual retirement accounts (the IRAs) established by certain 
employees, officers, directors and/or shareholders of the Employers 
(the Individuals); provided that the following conditions are met:
    (a) A qualified, independent fiduciary of the Fund determines that 
the services provided by the Service Providers are in the best 
interests of the Fund and are protective of the rights of the 
participants and beneficiaries of the Fund;
    (b) The terms associated with the provision of services by the 
Service Providers to the Plans, the Thrift Plan, and the IRAs, at the 
time such services are entered into, are not less favorable to all 
parties to the transaction than the terms generally available in 
comparable arm's-length transactions involving unrelated parties;
    (c) The Service Providers receive reasonable compensation for the 
provision of services, as determined by an independent fiduciary;
    (d) Prior to the provision of services by the Service Providers, 
the independent fiduciary will first review such services and will 
determine that such services are reasonable and appropriate for the 
Service Providers, taking into account such factors as: Whether the 
Service Providers have the capability to perform such services, whether 
the fees to be charged reflect arm's-length terms, whether Service 
Provider personnel have the qualifications to provide such services, 
and whether such arrangements are reasonable based upon a comparison 
with similarly qualified firms in the same or similar locales in which 
the Service Providers propose to operate;
    (e) No services will be provided by the Service Providers without 
the prior review and approval of the independent fiduciary;

[[Page 62615]]

    (f) Not less frequently than quarterly, the independent fiduciary 
will perform periodic reviews to ensure that the services offered by 
the Service Providers remain appropriate for the Service Providers and 
that the fees charged by the Service Providers represent reasonable 
compensation for such services;
    (g) Not less frequently than annually, the Service Providers will 
provide a written report to the board of directors of the Fund 
describing in detail the services provided to the Plans, the Employers, 
the IRAs, and the Thrift Plan, a detailed accounting of the fees 
received for such services, and an estimate as to the amount of fees 
the Service Providers expect to receive during the following year from 
such Plans and Employers;
    (h) Not less frequently than annually, the independent fiduciary 
will conduct a detailed review of approximately 10 percent of all 
transactions completed by the Service Providers which will include a 
reasonable cross-section of all services performed; such transactions 
will be reviewed for compliance with the terms and conditions of this 
exemption;
    (i) The financial statements of the Service Providers will be 
audited each year by an independent certified public accountant, and 
such audited statements will be reviewed by the independent fiduciary;
    (j) The independent fiduciary shall have the authority to prohibit 
the Service Providers from performing services that such fiduciary 
deems inappropriate and not in the best interests of the Service 
Providers and the Fund;
    (k) Each Service Provider contract with an Employer, an IRA, the 
Thrift Plan or a Plan will be subject to termination without penalty by 
any of the parties to the contract for any reason upon reasonable 
written notice;
    (l) Trustco will act solely as a directed trustee and will not:
    (1) Have any investment discretion with respect to the assets being 
held in trust,
    (2) Engage in any securities lending transactions, and/or
    (3) Provide any cash management services; and
    (m) A majority of the Board of Directors of the Thrift Plan will at 
all times be independent of, and separate from, the Board of Directors 
of the Fund, the Board of Directors of Pentegra, and the Board of 
Directors of Trustco, and, with respect to the selection of Trustco 
and/or Pentegra as provider(s) of services to the Thrift Plan:
    (1) Such majority members alone will give prior approval upon 
determining that such services are necessary and the associated fees 
charged are reasonable; and
    (2) Any member of the Board of Directors of the Thrift Plan 
contemporaneously participating as a member of the Board of Directors 
of Pentegra (Trustco) will remove himself or herself from all 
consideration by the Thrift Plan regarding the provision of services by 
Trustco (Pentegra) to the Thrift Plan and will not otherwise exercise, 
with respect to such provision(s) of services, any of the authority, 
control or responsibility which makes him or her a fiduciary.

Section II. Recordkeeping

    (1) The independent fiduciary and the Fund will maintain, or cause 
to be maintained, for a period of 6 years, the records necessary to 
enable the persons described in paragraph (2) of this section to 
determine whether the conditions of this exemption have been met, 
except that: (a) A prohibited transaction will not be considered to 
have occurred if, due to circumstances beyond the control of the 
independent fiduciary and the Fund, or their agents, the records are 
lost or destroyed before the end of the six year period; and (b) no 
party in interest other than the independent fiduciary and the Board of 
Directors of the Fund shall be subject to the civil penalty that may be 
assessed under section 502(i) of the Act, or to the taxes imposed by 
section 4975(a) and (b) of the Code, if the records are not maintained, 
or are not available for examination as required by paragraph (2) 
below.
    (2)(a) Except as provided in section (b) of this paragraph and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (1) of this 
section shall be unconditionally available at their customary location 
during normal business hours by:
    (1) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service;
    (2) Any employer participating in the Fund and/or Thrift Plan or 
any duly authorized employee or representative of such employer;
    (3) Any participant or beneficiary of the Fund, Thrift Plan, or 
Plan or any duly authorized representative of such participant or 
beneficiary; and
    (4) Any Individual;
    (b) None of the persons described above in subparagraphs (a)(2) and 
(a)(3) of this paragraph (2) shall be authorized to examine trade 
secrets of the independent fiduciary or the Fund, or their affiliates, 
or commercial or financial information which is privileged or 
confidential.
    (3) For purposes of this section, references to the Fund shall also 
include the Service Providers.
    The availability of this exemption is subject to the express 
condition that the material facts and representations contained in the 
application for exemption are true and complete and accurately describe 
all material terms of the transactions. In the case of continuing 
transactions, if any of the material facts or representations described 
in the application change, the exemption will cease to apply as of the 
date of such change. In the event of any such change, an application 
for a new exemption must be made to the Department.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the proposed exemption and PTE 95-31 which are cited above.

Ivan L. Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
[FR Doc. E6-17922 Filed 10-25-06; 8:45 am]

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