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5500 Preparer's Manual for 2012 Plan Years
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from Spencer’s Benefits Reports: A violation of the fiduciary rules of ERISA Sec. 406(b) and the party-in-interest rules of ERISA Sec. 3(14) should be determined by all of the relevant facts and circumstances when common ownership and control relationships are concerned the Department of Labor said in Advisory Opinion 2011-06A, issued on Feb. 4, 2011.
In the situation addressed in Advisory Opinion 2011-6A, Mitsubishi Group Brokers and Mitsubishi Bank are brother-sister corporations. Currently, Mitsubishi Bank owns 18.75% of the common stock of Aberdeen Asset Management PLC (Aberdeen PLC), with the right to acquire and hold up to 19.9% of Aberdeen PLC’s common stock and appoint a director to the Aberdeen PLC Board of Directors. Aberdeen PLC wholly owns four U.S. registered investment advisors, collectively known as Aberdeen Asset Management (AAM).
The request for an advisory opinion concerns whether the Sec. 406(b) fiduciary rules would be violated when service transactions occur between a Mitsubishi Group Broker and employee benefit plans for which AAM acts as a fiduciary (e.g., as an investment manager). The DOL stated that “ERISA Sec. 406(b) prohibits, in pertinent part, a fiduciary with respect to a plan from dealing with the assets of a plan in his or her own interest or for his or her own account, or from acting, in his or her individual or in any other capacity, in any transaction involving the plan on behalf of a party (or representing a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries….Thus, a fiduciary may not use the authority, control, or responsibility that makes him a fiduciary to cause a plan to pay an additional fee to such fiduciary, or to a person in which he has an interest that may affect the exercise of his best judgment as a fiduciary, to provide a service.”
While Mitsubishi Group Broker is not a party in interest under ERISA Sec. 3(14) because of its indirect ownership of AAM, the DOL says that this does not mean that a violation of Sec. 406(b) would not occur. “The fiduciaries should consider all the facts and circumstances relating to the nature and extent of the common ownership or control relationship.”
The DOL continues, “Where a relationship with a service provider may affect the exercise of a fiduciary’s best judgment as fiduciary, the fiduciary may not exercise the authority, control, or responsibility that makes such person a fiduciary with respect to the transaction. For some transactions, it may be possible for an investment manager to implement objective criteria and policies, approved by the investing plans, so that the investment manager does not exercise any fiduciary judgment in connection with the transaction. Whether any particular criteria or policies would have this effect also involves inherently factual questions on which the Department generally will not provide an opinion….Under ERISA Sec. 404(a)(1), AAM, as the responsible plan fiduciary, must act prudently and solely in the interest of the plan participants and beneficiaries in deciding whether to enter into, or continue, service provider arrangements.”
The Advisory Opinion adds that the indirect ownership arrangement did not exclude AAM from the prohibited transaction relief afforded by class PTE 84-14 to qualified professional asset managers. While the prohibited transaction exemption would apply to violations of ERISA Sec. 406(a), “no relief would be provided if a violation of Sec. 406(b) occurred in connection with AAM’s decision to retain a Mitsubishi Group Broker.”
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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