December 1, 1997
Negotiated Pension Plans, Ltd.
1107 Wilson Ave.
Green Bay, WI 54303-4206
Dear Mr. Konshak:
This is in response to your request for an information letter concerning the payment of expenses by an employee pension benefit plan in connection with actuarial services required under section 103(a)(4)(A) of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you have raised the following three issues: (1) whether a plan administrator must solicit fee quotations in selecting an actuary to provide services to a plan; (2) whether a plan's payment for actuarial services in excess of the lowest quoted fee would violate the fiduciary provisions of ERISA; and (3) if a service provider is compensated for more than one category of services (e.g. actuarial, administrative and legal), whether the plan administrator must separately report on the Schedule C (Form 5500) the compensation paid to the service provider for each category of services.
Section 103(d) of ERISA provides, with certain exceptions not applicable here, that an annual report with respect to an employee pension benefit plan shall include an actuarial statement applicable to the plan year identifying, among other things, the contributions, assets and liabilities of the plan, and the actuarial assumptions used to determine the liabilities. Section 103(a)(4)(A) of ERISA provides that the administrator of an employee benefit pension plan subject to the reporting requirements of subsection (d) of this section shall engage, on behalf of all plan participants, an enrolled actuary who shall be responsible for the preparation of the materials comprising the actuarial statement required under subsection (d).1
The selection of an actuary to provide the required services under section 103(a)(4)(A) of ERISA is an exercise of discretionary authority or control with respect to the management and administration of the plan within the meaning of section 3(21) of ERISA, and therefore constitutes a fiduciary act subject to the general fiduciary responsibility standards and prohibited transaction provisions contained in Title I of ERISA. Section 404(a)(1) of ERISA requires, among other things, that a fiduciary discharge his or her duties with respect to a plan solely in the interest of the participants and beneficiaries and 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.
Section 406(a)(1)(C) and (D) of ERISA provide, in part, that a fiduciary with respect to an employee benefit plan shall not cause the plan to engage in a transaction if he or she knows or should know that such transaction constitutes a direct or indirect furnishing of services between the plan and a party in interest with respect to the plan or transfer to, or use by, or for the benefit of, a party in interest, of any assets of the plan. Section 408(b)(2) of ERISA provides a statutory exemption from the prohibitions of section 406(a) for contracting or making reasonable arrangements with a party in interest, including a fiduciary, for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.
In selecting a service provider such as an enrolled actuary, the responsible plan fiduciary must engage in an objective process designed to elicit information necessary to 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. In addition, such process should be designed to avoid self-dealing, conflicts of interest or other improper influence. What constitutes an appropriate method of selecting a service provider, however, will depend upon the particular facts and circumstances. Soliciting bids among service providers at the outset is a means by which the fiduciary can obtain the necessary information relevant to the decision-making process. Whether such a process is appropriate in subsequent years may depend, among other things, upon the fiduciary's knowledge of a service provider's work product, the cost and quality of services previously provided by the service provider, the fiduciary's knowledge of prevailing rates for the services, as well as the cost to the plan of conducting a particular selection process. Regardless of the method used, however, the fiduciary must be able to demonstrate compliance with ERISA's fiduciary standards.
Because a number of factors will necessarily be considered by a fiduciary when selecting a service provider, a fiduciary need not necessarily select the lowest bidder when soliciting bids, although the compensation paid to the service provider by the plan must be reasonable in light of the services provided. The fiduciary should not consider one factor, such as the lowest fee bid for services, to the exclusion of any other factor, such as the quality of the work product. Rather, the decision regarding which service provider to select should be based on an assessment of all the relevant factors, including both the quality and cost of the services.
You also asked a question about the Schedule C, "Service Provider and Trustee Information," which is required to be attached to the Form 5500 to report, among other things, all persons who received, directly or indirectly, $5,000 or more in compensation from the plan for services rendered during the plan year.2 The Schedule C (Form 5500) requires the listing of the following information regarding each such service provider on a separate line: name and employer identification number (EIN) of the service provider (columns "(a)" and "(b)"); official plan position (column "(c)"); relationship to the employer, employee organization, or any person known to be a party-in-interest, (column "(d)"); total compensation paid by the plan (columns "(e)" and "(f)"); and "Nature of service code" (column "(g)"). The instructions for column (g) tell the filer to enter from a list "the code that best describes the nature of services provided to the plan," and further explain that "[i]f more than one service was provided, enter only the code of the primary service." Therefore, while the total compensation paid to a service provider for all types of services rendered must be reported, only the primary service needs to be identified.3
We hope this information will be helpful to you.
Bette J. Briggs Chief, Division of Fiduciary Interpretations Office of Regulations and Interpretations
1 See also the Department's regulations at 29 C.F.R. §2520.103-1, et. seq., under which the Form 5500 (for plans with 100 or more participants) and the Form 5500-C/R (for plans with fewer than 100 participants), together with the required statements and schedules, constitute an alternative method of compliance or simplified annual report for plans subject to the annual reporting requirements in Title I of ERISA.
2 The Schedule C must also be filed to identify plan trustees who served during the plan year, and to provide information on certain services providers whose appointments were terminated (such as accountants or enrolled actuaries). The Schedule C is not a required attachment to the Form 5500-C/R.
3 This information relates to the 1996 Form 5500. For future plan year reports, you should check both the form and instructions carefully for changes. Furthermore, we note that lines 32(g)(1)-(10) of the 1996 Form 5500 require that administrative expenses paid by or charged to the plan be reported by category of expense (e.g., accounting fees, actuarial fees, legal fees contact administrator fees, etc.).
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