Advisory Opinion

May 21, 1999

Patricia A. Shlonsky
Ulmer & Berne, LLP
Bond Court Building
1300 East Ninth Street, Suite 900
Cleveland, Ohio 44114-1583

1999-09A
408(b)

Dear Ms. Shlonsky:

This is in response to your request for an advisory opinion on behalf of the Northeast Ohio Carpenters’ Joint Apprenticeship and Training Trust Fund (the Fund). Specifically, you ask whether the Fund would engage in a prohibited transaction under section 406 of the Employee Retirement Income Security Act of 1974, as amended, (ERISA) if it retained and compensated, for the purpose of constructing an addition to the Fund’s training facility, a general contractor or subcontractor that employs or is owned by a plan fiduciary.

You represent that the Fund, a welfare plan that provides training to apprentices, journeymen and other members of the Northeast Ohio District Council of the United Brotherhood of Carpenters and Joiners of America, AFL-CIO (the Union), is administered by the Northeast Ohio Joint Apprenticeship Training Committee (the Committee). The Committee consists of at least seven Union representatives and seven management representatives. The Fund maintains a facility in Richfield, Ohio. The facility was constructed in 1990 and is used to provide apprenticeship training to plan participants.

You further represent that the Committee intends to construct an addition to its apprenticeship training facility. You indicate that an addition to the facility is necessary to the operation of the plan due to significant growth in the number of apprentices and journeymen for whom the fund provides training, combined with a need to provide additional types of training as mandated by federal law.

You represent that the Committee intends to solicit bids for a general contractor to supervise the overall project of building the addition and that it intends to retain an independent architect to review all bids and make recommendations to the Committee with respect to the selection of the general contractor. You anticipate that certain contractors who have representatives on the Committee will submit bids to serve as the general contractor for this project and possibly for other projects in the future.(1) To the extent that a contractor submits a bid and is recommended to the Committee by the independent architect, the Committee member related to that contractor will remove him or herself from the decision making process. You further represent that, in the event the Committee member’s entity is selected as the general contractor, the Fund would compensate the entity for whom the Committee member works and would not compensate the Committee member directly.

You also indicate that it is possible that the general contractor selected to build the addition will retain subcontractors who have representatives on the Committee. These subcontractors will be specifically listed as part of the bidding process. In the event a proposed subcontractor has a representative on the Committee, the Committee member related to that subcontractor also would remove him or herself from the decision making process.

You ask whether the retention of a general or subcontractor under the above-described circumstances would violate the provisions of section 406 of ERISA.

An employer that contributes to a plan is a party in interest with respect to the plan pursuant to section 3(14)(C) of ERISA. A fiduciary with respect to a plan is also a party in interest with respect to the plan pursuant to section 3(14)(A) of ERISA. As defined in section 3(21)(A) (i) and (iii), a person is a fiduciary with respect to a plan to the extent that he or she exercises any discretionary authority or discretionary control respecting the management of such plan or exercises any authority or control respecting the management or disposition of its assets, or to the extent that he or she has any discretionary authority or responsibility in the administration of such plan. Therefore, any person who serves as a Committee member is a fiduciary with respect to the Plan.

Section 406(a)(1)(C) of ERISA prohibits a fiduciary with respect to a plan from causing the plan to engage in a transaction that he or she knows or should know constitutes a direct or indirect furnishing of goods, services or facilities between the plan and a party in interest. Section 406(a)(1)(D) prohibits such a fiduciary from causing a plan to engage in a transaction that he or she knows or should know constitutes a transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Thus, in the absence of an administrative or statutory exemption, the provision of goods or services to a plan by a contributing employer with respect to a plan would be a prohibited transaction under sections 406(a)(1)(C) and 406(a)(1)(D) of ERISA.

Subject to the conditions set forth in section 408(d) of ERISA, section 408(b)(2) of ERISA exempts from the prohibitions of section 406(a) a payment by a plan to a party in interest, including a fiduciary, for a service (or a combination of services) if: (1) such service is necessary for the establishment or operation of the plan; (2) such service is furnished under a contract or arrangement which is reasonable; and (3) no more than reasonable compensation is paid for such service. Regulations issued by the Department clarify the terms “necessary service” (29 C.F.R. § 2550.408b-2(b)), “reasonable contract or arrangement” (29 C.F.R. § 2550.408b-2(c)), and “reasonable compensation” (29 C.F.R. § 2550.408c-2), as used in section 408(b)(2) of ERISA.

We note as a preliminary matter that the decision to build an addition to the training facility using the Fund’s assets is a fiduciary decision governed by the provisions of Title I of ERISA, including the duty of loyalty contained in sections 403(c) and 404(a)(1)(A) and the duty of prudence contained in section 404(a)(1)(B), cf. 29 C.F.R. § 2509.94-1. It is also, as is any decision involving plan assets, subject to the prohibited transaction provisions in section 406.

A party in interest’s provision of the contracting services to build the addition would be exempt from the prohibitions of section 406(a)(1) of ERISA if the conditions described in section 408(b)(2) were met. We note, however, that the questions of what constitute a necessary service, a reasonable contract or arrangement, and reasonable compensation are inherently factual in nature. The Department generally will not issue opinions on such questions. The Committee members or other appropriate Fund fiduciaries would be required to determine, based on all the relevant facts and circumstances, whether the conditions of section 408(b)(2) were met.

Section 408(b)(2) and the regulations promulgated thereunder, however, do not provide an exemption from the prohibitions of section 406(b) of ERISA. Section 406(b)(1) prohibits a plan fiduciary from dealing with plan assets in his or her own interest or for his or her own account. Section 406(b)(2) prohibits such a fiduciary from acting in a transaction involving the plan in his or her individual or in any other capacity on behalf of or as representative of a party whose interests are adverse to the interests of the plan or of its participants and beneficiaries. In this regard, 29 C.F.R. § 2550.408b-2(e) of the Department’s regulations explains that a fiduciary may avoid engaging in an act described in ERISA section 406(b)(1) if such fiduciary does not use the authority, control or responsibility that makes such person a fiduciary to cause a plan to pay a fee for a service furnished by a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary.

If a Committee member, in the situation you describe, uses the authority, control or responsibility that makes him or her a fiduciary to cause the Fund to pay a fee for contracting services furnished by himself or herself or by a person in whom such Committee member has an interest that may affect the exercise of his or her best judgment as a fiduciary, such as, for example, a contributing employer that employs such Committee member, the Committee member would be engaging in, among other things, an act described in section 406(b)(1) of ERISA. Moreover, if a Committee member uses the authority, control, or responsibility that makes him or her a fiduciary to cause the Fund to reject the bid of a contractor or subcontractor under circumstances in which an entity in which the fiduciary has an interest had submitted a competing bid for the project, the committee member would likewise be engaging in, among other things, an act described in section 406(b)(1) of ERISA. Similarly, if a Committee member, or an entity in which the Committee member had an interest, intended to submit a bid for the project, then the Committee member’s participation in the Committee’s consideration of the terms and conditions of the bid solicitation would constitute an act described in section 406(b)(1) of ERISA. Such acts by the Committee member would also be in violation of the prohibitions of section 406(b)(2) of ERISA.

In AO 79-72A (Oct. 10, 1979 letter to William D. Watters, Esq.), the Department concluded, with the respect to the provision of training services by contributing employers to an apprenticeship training fund, that by removing himself or herself from all consideration by the Plan of whether or not to engage in such a transaction, and by not otherwise exercising, with respect to the transaction, any of the authority, control or responsibility which makes him or her a fiduciary, and absent any arrangement, agreement or understanding with respect to who will ultimately provide the services in question, a Committee member may avoid engaging in an act described in sections 406(b)(1) or 406(b)(2) of ERISA.

In the situation you have described, recusal would be sufficient only if the Committee member recuses him or herself from all consideration by the Fund of whether or not to engage in the transaction as of the time that the entity in which the Committee member has an interest intends to enter a bid for the project, whether in the capacity of a general contractor or a subcontractor. Furthermore, recusal itself would not be sufficient if there is any arrangement, agreement or understanding between or among Committee members and/or other parties in interest with regard to bidding on contracts, awarding contracts, or the hiring subcontractors paid for with Fund assets, whether such arrangement, agreement, or understanding arises prior to, during, or after the recusal, and whether such arrangement, agreement, or understanding concerns the present project, related projects, or future projects.

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,

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

Footnotes

  1. You note, however, that with respect to future projects, an independent architect would likely not be utilized unless the size of the project warranted retention of such an individual. However, Committee members affiliated with entities bidding on the projects would recuse themselves from the decision making process.