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Employee Benefits Security Administration

Advisory Opinion

February 15, 2001

Theodore R. Groom
Groom Law Group
1701 Pennsylvania Ave., NW
Washington, D.C. 20006-5893

ERISA Sec. 3(21)(A)

Dear Mr. Groom:

This is in response to your request for an advisory opinion under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) in connection with The Prudential Insurance Company of America’s (Prudential) proposed plan of demutualization. You ask whether Prudential will be acting in a fiduciary capacity when it provides its policyholders with certain information regarding the allocation of demutualization proceeds attributable to those policyholders. You also ask whether Prudential would be acting in a fiduciary capacity if it implements a specified default method of allocating demutualization consideration among participating individuals in 401(k) type plans for which Prudential provides administrative services such as record keeping, and among participating individuals in certain group contract payroll deduction individual retirement annuity and tax deferred annuity arrangements (IRAs and TDAs)(1) where Prudential provides advance notice to the group policyholder that the allocation method will be implemented if the policyholder does not direct Prudential otherwise by a specified deadline.

You represent that Prudential is a mutual life insurance company. As a mutual life insurance company, Prudential has no authorized, issued, or outstanding stock. Instead, the insurance and annuity policies issued by Prudential combine both insurance coverage and proprietary ownership rights (sometimes referred to as membership rights). You indicate that Prudential is reviewing a proposed draft plan of reorganization (Plan or Plan of Reorganization) to convert from a mutual life insurance company to a stock life insurance company (a process known as demutualization). The Plan of Reorganization is subject to the review and approval of Prudential’s Board of Directors and the Commissioner of Banking and Insurance of the State of New Jersey (New Jersey Commissioner). You state that New Jersey law requires that policy holders who are qualified voters vote as to whether to approve the plan. In the case of a group policy, the qualified voter, as described in more detail in Advisory Opinion 2001– 03A, generally is the person or entity to whom the policy is issued (often an employer), rather than each individual who is covered under the arrangement.

As a stock company, Prudential will gain access to public equity and debt markets. The plan will propose that 100% of the equity value of Prudential (currently estimated to be between 15 and 20 billion dollars) will be distributed to eligible policyholders in the form of stock, cash, or policy credits. All of Prudential’s policyholder obligations will remain unchanged and fully in force after the conversion.

If the Plan of Reorganization is approved, the membership interests of all policyholders will be extinguished. Payments of stock, cash, or policy credits (i.e., enhancements to policy values) will be made in consideration of the policyholders’ extinguished membership rights in Prudential. The amount of the distributions will be established pursuant to actuarial valuations reviewed and approved by the New Jersey Commissioner.

You represent that under Prudential’s proposed demutualization, there are two components of compensation for eligible policyholders — fixed and variable. Each eligible policyholder will be allocated the same basic fixed component. The variable component will be provided to those eligible policyholders whose policies produce a positive contribution to Prudential’s surplus. The variable component focuses on the contribution of the policy as a whole to Prudential’s surplus, including both the historical and anticipated future contributions to surplus. A policy’s contribution to surplus is determined by identifying the profit and expense associated with that contract. Profits and expenses can be affected by, for example, the type of policy, the date it was issued, and the period during which it was outstanding. Moreover, Prudential’s surplus, as reflected on applicable financial statements, will not be distributed to policyholders. Instead, the relative contribution to surplus of each eligible contract is determined, and then each policyholder is given a corresponding percentage allocation. That percentage allocation is then translated into a number of shares, and the results of the initial public offering will determine the value of those shares.

You represent that Prudential has issued tens of thousands of contracts that provide benefits under ERISA-covered employee benefit plans. With respect to these ERISA plans, the policyholder must decide how to use the consideration that is a plan asset.(2) In this regard, Prudential expects that group policyholders may seek Prudential’s assistance as follows.

Prudential provides participant-level services (e.g., record keeping and administrative services) to some group policyholders who administer ERISA-covered plans. These policyholders may be required to allocate some or all of the consideration among participants that participate in the plans. Prudential would like to identify for these group policyholders the types of participant allocation methods Prudential is capable of implementing through its record keeping systems. Where the policyholder is required to allocate the consideration, and Prudential is the record keeper for the plan, Prudential, as record keeper, will have to record allocations among accounts at the time the proceeds are distributed in order to comply with the obligations to policyholders under the Plan of Reorganization.

In the case of section 401(k) plans for which Prudential provides record keeping and other administrative services, Prudential would provide a notice to the group policyholder indicating that Prudential could accommodate an instruction from the policyholder to allocate consideration: (1) on a per capita basis, i.e., equal allocation of consideration to each eligible participant; (2) on a pro rata basis, i.e., allocate according to the value of the participant account.  Prudential would also indicate that it would discuss and consider the feasibility of implementing any other allocation instruction in which the policyholder may be interested.

Prudential contemplates that when or soon after it notifies the policyholders of the amount of consideration the policyholders will receive, Prudential will also describe to the policyholders the alternatives offered by it for allocating the consideration to the participants (if the policy only funds one employee plan) or to the particular employee benefit plans (if the policy funds more than one plan). In describing these alternatives, neither Prudential, nor any of its affiliates, would provide any advice or recommendations to the policyholder on which option, if any, to choose. The policyholder would be free to choose a different approach and to explore the feasibility of having Prudential implement that approach. Prudential will follow the directions of the policyholder so long as it is administratively feasible.

Specifically, you represent that in connection with the vote, each policyholder, including group policyholders, will be provided with a Policyholder Information Booklet, that provides: (1) notice of a public hearing to be held by the insurance department; (2) notice of the policyholder vote; (3) a detailed summary of the proposed plan. Prudential will also provide a Group Guide to group policyholders.  The Group Guide identifies issues that must be addressed by plans, group TDAs and group IRAs receiving demutualization proceeds, including the possibility that proceeds will have to be allocated among individual participants (certificate holders) covered by a group policy or contract.

Following the distribution of the Group Guide, Prudential will send a letter to each group policyholder: (1) specifically describing the methods of allocating the proceeds among the individual participants (certificate holders) covered by the group policy or contract that Prudential is administratively able to implement; (2) soliciting the group policyholder’s direction as to its desired participant allocation method (Allocation Letter).  A follow-up letter (Follow-up Letter) will be sent to those group policyholders who have not provided an affirmative participant allocation direction within 30 days after the Allocation Letter is sent. The Follow-up Letter will reiterate Prudential’s request for an affirmative direction, but will indicate that if a direction is not received by a date that is at least 30 days from the date of the Follow-up Letter, the policyholder will be deemed to have directed Prudential to implement the default allocation method (i.e., the per capita method).

A policyholder thus will have at least 60 days to consider its specific options for the participant allocation method. Moreover, a policyholder will have been aware of the issue and of the need to select an allocation method for a significantly longer period of time. If Prudential receives an affirmative, written direction in response to the Allocation or Follow-up Letters, or otherwise, from the policyholder as to how to allocate the consideration, as part of its record keeping and administrative services, Prudential would allocate the consideration on the basis of this direction. If Prudential receives instruction for an allocation that its systems could not accommodate, Prudential would notify the policyholder and discuss possible alternatives.

Prudential also wishes to provide policyholders of policies that fund more than one ERISA-covered employee benefit plan a calculation of the amount of consideration (as a percentage of the total consideration paid in respect of the policy) that is attributable to each employee benefit plan funded by the insurance policy. This information will be currently available to Prudential because, in calculating the total consideration payable with respect to the policy, Prudential first determines on a plan-by-plan basis the amount of surplus that is attributable to each plan covered by the particular policy. Thus, you represent that Prudential will make available to the policyholder its determination of consideration based on the amount of surplus that each employee benefit plan contributed applying the same actuarial methods provided under the Plan of Reorganization.

If Prudential receives an affirmative, written direction from the policyholder as to how to allocate the consideration among the plans covered by the policy, it will follow those directions. If the policyholder fails to direct Prudential as to allocation of the proceeds among multiple plans, Prudential will distribute the entire amount of the consideration to the policyholder, as required by the Plan of Reorganization and state law. Prudential will not implement a default allocation between plans under a single policy. Prudential also will not implement a default participant allocation where there has been no plan allocation. However, if a policyholder provides an affirmative direction to Prudential allocating the consideration due under a single policy to more than one plan, Prudential will implement that direction. If one or more of the plans to which the consideration is allocated provides for participant accounts, Prudential will provide the same process described above for group policies covering only one plan that have participant accounts.

With respect to Prudential’s selection of the per capita method as the default allocation method among participants, you believe that because the demutualization consideration allocated to each policy is not determined on an accretion basis, and because the profitability of a given contract during a given period does not necessarily correlate to the premiums paid or amounts invested under the contract during that time, it would not be appropriate or useful to look to Prudential’s methodology for allocating consideration to policyholders as a model for allocating consideration among individual participants (certificate holders) covered by a group policy. You note that the most likely of the possible allocation methods among individual participants (certificate holders) in a group policy are pro rata by account balance (or premiums paid) or per capita. You indicate that neither method is necessarily more appropriate in all cases. For example, the pro rata approach may recognize the relative amounts paid into the contract by individual participants, but it allocates to current participants with large current balances (or premium histories) a higher share of the historical surplus, a surplus that may have been attributable to long-departed employees. The per capita approach generally will allocate an equal share of the group contract’s demutualization proceeds to all the individual participants (certificate holders) covered under the group contract (even lower-paid participants with small overall account balances) and will not favor highly compensated employees, but does not recognize that the higher premiums paid by certain certificate holders might have contributed to Prudential’s profitability.

You represent that Prudential will use the per capita method as the default allocation method for those record keeping clients (as well as the TDA and IRA clients) who do not affirmatively designate an allocation method. The per capita method was chosen because Prudential concluded it was fair under the circumstances.(3) The per capita method is not less expensive to administer than other methods and cost was not a consideration in choosing the default method.

The circumstances under which Prudential provides record keeping and administrative services to plans, you believe, would not cause Prudential to be considered a fiduciary.(4) You seek assurance, however, that Prudential will not be deemed to be a fiduciary with respect to a plan merely by virtue of: (1) providing to eligible group policyholders a description of administratively-feasible alternatives for allocating demutualization consideration to participants or plans, and then; (2) with respect to allocation among participants, following the policyholders’ directions (including direction by negative consent) regarding allocation.

ERISA section 3(21)(A) provides that a person is a fiduciary with respect to a plan to the extent that he or she: (1) exercises any discretionary authority or control respecting management of the plan or exercises any authority or control respecting management or disposition of its assets; (2) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the plan, or has any authority or responsibility to do so; (3) has any discretionary authority or responsibility in the administration of the plan.(5)

Interpretive Bulletin 75-8 (IB 75-8, 29 CFR 2509.75-8) provides additional guidance concerning what types of functions will make a person a fiduciary with respect to a plan. In particular, question-and-answer D-2 states that a person who performs purely ministerial functions, such as preparation of employee communications material, preparation of government reports, and preparation of reports concerning participants' benefits, among others, within a framework of policies, interpretations, rules, practices and procedures made by other persons is not a fiduciary because such person does not have or exercise any discretionary authority or control regarding the management of the plan or its assets.

Pursuant to these provisions, a determination of whether a person is a fiduciary with respect to a plan requires an analysis of the types of functions performed and actions taken by the person on behalf of the plan to determine whether particular functions or actions are fiduciary in nature and therefore subject to ERISA's fiduciary responsibility provisions. As a result, the question of whether Prudential is a fiduciary within the meaning of section 3(21)(A) of ERISA is inherently factual and will depend on the particular actions or functions Prudential performs on behalf of plans.

It is the view of the department, however, that a person would not be exercising discretionary authority or control over the management of a plan or its assets solely as a result of providing information to its policyholders or clients for whom it provides record keeping or other administrative services regarding what actions are administratively feasible for it to implement in connection with corporate and state laws that require action be taken by the policyholder for the plan. Moreover, as long as the appropriate plan fiduciary makes the decision as to which of the feasible actions should be implemented, the person implementing this decision would not become a fiduciary.

On the basis of your representations that Prudential must take action to make some allocation to comply with the Plan of Reorganization and that Prudential will provide the policyholder advance notice of the allocation options and a reasonable period of time (here at least 60 days) to select an option, it is the view of the department that Prudential would not become a fiduciary solely as a result of providing this information. In addition, as long as the plan fiduciary actually chooses the default allocation, its failure to communicate affirmatively that decision to Prudential would not cause Prudential to become a fiduciary by implementing that option. Whether a particular plan fiduciary actually chooses the default allocation is an inherently factual question. The department generally will not provide an opinion on such questions.

It should be noted that to the extent that a plan fiduciary in the exercise of his or her fiduciary responsibility is making the determination as to how the demutualization proceeds should be allocated, ERISA’s general standards of fiduciary conduct would apply to the determination. Under section 404(a)(1) of ERISA, the responsible plan fiduciaries must act solely in the interest of the plan participants and beneficiaries. In this regard, the department notes that a fiduciary has a duty of impartiality to the plan’s participants, and a selection of an allocation method that benefits the fiduciary, as a participant in the plan, at the expense of other participants in the plan will be inconsistent with this duty. See Restatement (Second) of Trusts § 183 (requiring fiduciaries to deal impartially with beneficiaries). Moreover, in situations where multiple plans are covered by a single policy, the use of proceeds generated by one plan to benefit the participants of another plan may be a breach of the duty of loyalty to a plan’s participants.

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.

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


  1. You have represented that certain of the IRAs and TDAs at issue are otherwise exempt from coverage under Title I of ERISA by virtue of 29 CFR 2510.3-2(d) and (f). The coverage implications of the determinations regarding the vote on the demutualization and the allocation among participating individuals are addressed in Advisory Opinion 2001– 03A, issued simultaneously with this letter. We note, however, that even if the IRAs and TDAs are not subject to Title I of ERISA, they still are subject to the prohibited transaction provisions of section 4975 of the Internal Revenue Code (the Code), and the definition of fiduciary under section 4975(e)(3). Under Presidential Reorganization Plan No. 4 of 1978, the authority of the Secretary of the Treasury to issue interpretations regarding section 4975 has been transferred, with certain exceptions not here relevant, to the Secretary of Labor.

  2. The proceeds of the demutualization will belong to the plan if they would deemed to be owned by the plan under ordinary notions of property rights. See Advisory Opinion 92-02A, Jan. 17, 1992 (assets of a plan generally are to be identified on the basis of ordinary notions of property rights under non-ERISA law). It is the view of the department that, in the case of an employee welfare benefit plan with respect to which participants pay a portion of the premiums, the appropriate plan fiduciary must treat as plan assets the portion of the demutualization proceeds attributable to participant contributions. In determining what portion of the proceeds are attributable to participant contributions, the plan fiduciary should give appropriate consideration to those facts and circumstances that the fiduciary knows or should know are relevant to the determination, including the documents and instruments governing the plan and the proportion of total participant contributions to the total premiums paid over an appropriate time period. In the case of an employee pension benefit plan, or where any type of plan or trust is the policyholder, or where the policy is paid for out of trust assets, it is the view of the department that all of the proceeds received by the policyholder in connection with a demutualization would constitute plan assets.

  3. Prudential has chosen the per capita allocation method for the Prudential-sponsored plans.

  4. You have not asked, and we do not provide any opinion, on whether Prudential’s provision of record keeping services to certain policyholders or 401(k) plans makes Prudential a fiduciary. Nor have you provided any information indicating whether Prudential otherwise acts in a fiduciary or trustee capacity with respect to any of the plans affected by the demutualization. To the extent that Prudential in fact is, or were to be deemed to be, a fiduciary, it would, in following the directions of the plan fiduciaries with respect to the allocation, have the same fiduciary obligations as any other fiduciary or trustee acting in accordance with the direction of other plan fiduciaries, including rejection of allocation instructions contrary to ERISA.

  5. The discussion in this letter of ERISA section 3(21)(A) also applies to Code section 4975(e)(3).