Category Archives: Investments

Today in ERISA History

Aug. 7, 1996 – The Dept. of Labor issues Advisory Opinion 96-15a, addressing whether a trust company which is a wholly-owned subsidiary of a registered investment adviser is a “bank or trust company” for purposes of ERISA section 408(b)(8), and a bank for purposes of PTE 91-38, and 29 CFR 2510.3-101(h)(ii). In this Advisory Opinion, the DOL finds that it is.

The Scudder Trust Company was a wholly-owned subsidiary of Scudder, Stevens & Clark, Inc., a registered investment adviser under the Investment Company Act of 1940. Scudder Trust served as discretionary trustee and 3(21) fiduciary for the assets of various employee benefits plans subject to Title I of ERISA. Scudder Trust hired Scudder, Stevens & Clark to manage or supervise the assets of those plans.

Scudder Trust, pursuant to a New Hampshire state statute, established several investment trusts designed to seek particular investment objectives. The investment trusts commingled the assets of eligible investors, including ERISA-covered plans, with substantially similar investment objectives into pooled investment trusts. Scudder Trust had the authority to appoint persons to manage the investment funds, and Scudder Trust appointed Scudder, Stevens & Clark, its parent company, to manage the funds.

Scudder Trust would be paid by the plans rather than from the investment funds. Scudder Trust would disclose to plans that Scudder, Stevens & Clark would be acting as the investment adviser and an independent fiduciary acting on behalf of the plans would both authorize transfers of plan assets to the investment trusts and approve the terms of the fees to be paid. The fees paid to Scudder, Stevens & Clark for managing the funds would be paid by Scudder Trust pursuant to an arrangement negotiated between the parties.

It was important to Scudder Trust that the DOL find the pooled investment funds are “maintained by a bank or trust company” in order to qualify for the statutory exemption of ERISA section 408(b)(8), Internal Revenue Code section 4975(d)(8) and Prohibited Transaction Exemption 91-38 because, unless the exemptions applied, the arrangement between Scudder Trust and Scudder, Stevens & Clark would violated ERISA sections 406(a)(1)(A), 406(a)(1)(D), 406(b)(1) and 406(b)(2).

The DOL found that the terms “bank or trust company” in ERISA section 408(b)(8) and the term “bank” in PTE 91-38 are not defined. The DOL further found that Scudder Trust was regulated by the same state authority and in the same manner as state chartered banks, and therefore, to the extent that Scudder Trust was so regulated, the DOL’s opinion was that Scudder Trust was a bank or trust company for purposes of ERISA section 408(b)(8) and a bank for purposes of PTE 91-38, and 29 CFR 2510.3-101(h)(ii).

Advisory Opinion 96-15A is mentioned in Advisory Opinion 2006-07A (Aug. 15, 2006) to support the proposition that a trust company which retained its parent company to manage a collective investment fund and whose activities were subject to a state banking commissioner’s supervision and examination would be considered a bank for purposes of PTE 91-38.

Court Finds ERISA Plans Invested with Madoff not Madoff Customers

If you’ve been wondering about whether the qualified plans invested with Bernard L. Madoff Investment Securities LLC would be able to recover some of their losses through the $500,000 maximum made available by the Securities Investor Protection Act of 1970 (SIPA) to customers of failed brokerage firms, the U.S. District Court for the Southern District of New York has answered “no” in an opinion issued on July 25, 2012.

Two groups of ERISA claimants had been joined together in a motion requesting recovery under SIPA. The first group consisted of individuals who participated in ERISA-regulated retirement plans that had accounts with Madoff. The second group consisted of entities that are ERISA-regulated plans or individual retirement accounts (IRAs) that invested directly or indirectly in a Madoff account-holder entity such as a hedge fund. No one in either group had their own account with Madoff but were invested with Madoff through feeder funds, where the plan had invested in the feeder fund, and the feeder fund had invested with Madoff.

The ERISA claimants said that if the Court correctly applied ERISA, they qualified as “customers” under SIPA’s definition of customer as “any person who has deposited cash with the debtor for the purpose of purchasing securities”. The Court determined that they were not claimants under that definition of “customer”, finding that “one cannot deposit cash with the debtor if this cash belongs to another”. The Court reasoning was that because assets in an ERISA-regulated plan are held and owned by the plan’s trustees, and not by the participants, the participants could not pursue recovery as a “customer” under SIPA.

Today in ERISA History

July 27, 2000 – The Dept. of Labor issues Advisory Opinion 2000-10A addressing whether allowing the owner of an IRA to direct the IRA to invest in a limited partnership in which relatives and the IRA owner in his individual capacity are partners, will violate Code section 4975. After discussing the meaning of Code section 4975(e)(2)’s definition of “disqualified person” and how it applies in this situation, the DOL found that the IRA’s purchase of an interest in the partnership would not constitute a Code section 4975(c)(1) transaction. Code section 4975(c)(1) prohibits any direct or indirect sale or exchange or leasing of any property between a plan and a disqualified person. The DOL further said that whether the proposed transaction violates Code section 4975(c)(1)(D) or (E) is a factual determination which the DOL will not issue an opinion on.

Violations of Code section 4975(c)(1)(D) or (E) can occur if the transaction is part of an agreement, arrangement or understanding in which the fiduciary causes plan assets to be used in a manner designed to benefit such fiduciary, or any person which such fiduciary had an interest which would affect the exercise of his best judgment as a fiduciary.

While this Advisory Opinion does not really add much to the rules the DOL applies when examining prohibited transactions, and the prohibited transaction rules have evolved since this Advisory Opinion was issued in 2000, it is noteworthy because of the investment itself. The investment was a family affair. The people involved in the investment covered by the Advisory Opinion were the fiduciary, the fiduciary’s son, the fiduciary’s father-in-law, the fiduciary’s son’s brother-in-law, the fiduciary’s mother-in-law, the fiduciary’s daughter and the fiduciary’s sister-in-law.

The IRA plan assets were managed by Bernard L. Madoff Investment Securities.

Today in ERISA History

April 25, 2000 – The Commodity Futures Trading Commission (CFTC) publishes a Final Rule on Commodity Pool Operators; Exclusion for Certain Otherwise Regulated Persons From the Definition of the Term “Commodity Pool Operator”. It adds ERISA section 3(33) church plans to the types of employee benefit plans that CFTC Rule 4.5(a)(4) says will not be construed to be commodity pools.

The CFTC says factors that influenced this decision were Congress exempting Church Plans from coverage under Title I and IV of ERISA “to avoid excess Government entanglement with religion in violation of the First Amendment to the Constitution”, and Congress deciding, in the National Securities Markets Improvement Act of 1996, that Church Plans are not investment companies under the Investment Company Act of 1940 and therefore they are not subject to registration as such.

Because the CFTC rarely interacts with ERISA (the IRS, DOL, SEC and PBGC do most of the heavy lifting when it comes to regulating plans), and because Commodity Pool Operator does not immediately come to mind when someone mentions church plans, this is one of the more unusual ERISA-related regulations. A little background –

The CFTC was created in 1974 with the enactment of the Commodity Futures Trading Commission Act. It was given the task of regulating commodity futures and option markets in the United States. In 1974, most futures trading happened in the agricultural sector.

A Commodity Pool Operator is an individual or organization that operates a commodity pool and solicits funds for that commodity pool.

A commodity pool is an enterprise in which funds contributed by a number of persons are combined for the purposes of trading futures contracts, options on futures, or retail of-exchange forex contracts, or to invest in another commodity pool.

If you have any examples of church plans operating commodity pools, please share. I’ve never been able to quite picture how church plans operate commodity pools. When I think of church plans, I think of plans designed to provide pension or retirement benefits to employees of the church, like the pastor and his wife.

Real Estate Investment Trusts and Retirement Plans

Scott Holsopple over at U.S. News & World Report has an article today about REITs: Are They for You? If you’ve been thinking about adding real estate investments to the mix of investments available through your plan, this article gives a good overview and is brief. After this article, the next stop is the stack of guidance issued by the IRS about REITs.

ERISA Stock Drop Lawsuit Against BP Over Gulf Oil Spill May Be Back from the Dead

National Law Journal has an article about the ERISA stock drop lawsuit against BP, indicating that this lawsuit may not be dead yet. In Picture Looks Grim for BP Shareholder Claims by Amanda Bronstad, published on April 12, 2012, the National Law Journal says the plaintiffs will be attempting to salvage their lawsuit by filing an amended complaint with the court.

On March 30, 2012, Judge Ellison of the U.S. District Court for the Southern District of Texas, Houston Division, granted BP’s motion to dismiss the ERISA stock drop class action lawsuit against BP which arose out of the Deepwater Horizon explosion in the Gulf of Mexico and the resulting oil spill – In re: BP p.l.c. Securities Litigation, MDL No. 10-md-2185 (March 30, 2012).

Plaintiffs are nine participants and beneficiaries in four individual account defined contribution plans sponsored by BP seeking to represent a class comprised of all persons who were participants in, or beneficiaries of, any of the four defined contribution plans sponsored by BP and whose accounts held units of BP Stock Fund at any time between Jan. 16, 2007 to June 24, 2010. In Jan. 2007, the BP Stock Fund comprised almost one-third, or approx. $3.1 billion, of the $9.5 billion in total assets of all four plans. The plaintiffs allege that the plans suffered substantial losses after the Deepwater Horizon disaster due to the plans’ large investments in the BP Stock Fund and the subsequent drop in the value of BP’s stock due to:

    1. defendants breaching their fiduciary duties by continuing to offer BP stock as an investment option to plan participants even though defendants knew, or should have known, that BP stock was not a suitable and appropriate investment;
    2. defendants breaching their fiduciary duties by failing to provide plan participants with complete and adequate information about the safety, stability, and prudence of investment in BP stock; and
    3. certain defendants breaching their fiduciary duties by failing to adequately monitor other fiduciaries.

In a 42-page opinion, after discussing the standard for pleading ERISA stock drop cases, Judge Ellison dismissed the Complaint but left open the possibility that the plaintiffs could refile and adequately allege the defendants made misrepresentations while acting in a fiduciary capacity and failed to properly monitor other fiduciaries.

Annuities as an Option in 401(k) Plans

U.S. News & World Report published an article today (Feb. 14, 2012) about annuities in 401(k) plans – “More 401(k)s May Get a Makeover With the Addition of Annuities“. Written by Rachel Konig Beals, it summarizes the information about annuities in defined contribution plans which the DOL tucked in at the end of the press release on Feb. 2, 2012 about the Final Final Fee Disclosure Regs.

The IRS has also been busy in this area. On Feb. 2, 2012, the IRS released two new Revenue Rulings on this topic.

Rev. Rul. 2012-3 is the Application of Survivor Annuity Requirements to Deferred Annuity Contracts Under a Defined Contribution Plan. In eight pages, it addresses the issue of how the qualified joint and survivor annuity (QJSA) and the qualified preretirement survivor annuity (QPSA) rules apply when a deferred annuity contract is purchased under a profit sharing plan in three given situations.

In two situations, participants are permitted to direct investment of their elective deferral and matching contributions accounts to a deferred annuity contract that is issued by an insurance company which pays benefits in one of several life annuity forms that can be elected during the 180-day period ending on the annuity starting date. The difference between the two scenarios is in the first situation, a participant who invests in a fixed deferred annuity contract may subsequently transfer those amounts out of the contract and elect to take those amounts in the form of a single-sum payment. The third situation addresses amounts attributable to matching contributions if the participant dies before the annuity starting date and spousal consent.

Rev. Rul. 2012-4 discusses Rollover from Qualified Defined Contribution Plan to Qualified Defined Benefit Plan to Obtain Additional Annuity. In eight pages, it addresses two different issues.

First – does a qualified defined benefit pension plan that accepts a direct rollover of an eligible rollover distribution from a qualified defined contribution plan maintained by the same employer satisfy Code sections 411 and 415 in a case in which the defined benefit plan provides an annuity resulting from the direct rollover that is determined by converting the amount directly rolled over into an actuarially equivalent immediate annuity using the applicable interest rate and the applicable mortality table under Code section 417(e).

Second – how does the result vary if the defined benefit plan applies different conversion factors for purposes of calculating the annuity resulting from the amount directly rollover over.

The holdings of Rev. Rul. 2012-4 are specifically limited to rollovers made on or after Jan. 1, 2013 pursuant to Code section 7805(b)(8) but the IRS states it will permit plan sponsors to rely on the holdings of this ruling with respect to rollovers made prior to Jan. 1, 2013.

DOL Files Lawsuit Against Plan Sponsor Over Investment in Ponzi Scheme

On Feb. 9, 2012, the DOL filed a lawsuit against John J. Barrett III, the owner of Dynasty Construction Inc., and Dynasty Construction Inc. for breach of fiduciary duty. The DOL seeks to recover more than $775,000 which the company’s 401(k) invested in Transcontinental Airlines Employee Investment Savings Account, an alleged ponzi scheme, in 2006. Dynasty Construction Inc. ceased operations in 2007.

The DOL’s press release announcing this lawsuit states that $775,000 represented nearly all of the assets in the accounts of the 19 plan participants as of the end of 2005. A check of the most recent Form 5500 (5500-SF for calendar year plan year ending Dec. 31, 2010) revealed 19 participants at the end of the 2010 plan year with $47,207 in total plan assets. (hat tip to for the 2010 Form 5500 information.) The 2010 Form 5500-SF was signed by John J. Barrett III on July 27, 2011.

The DOL’s lawsuit alleges that “the defendants failed to adequately or prudently research the credentials of the financial representative they retained, and failed to adequately or prudently research or analyze the investment of plan assets in the Transcontinental Airlines Employee Investment Savings Account”.

The Transcontinental Airlines Employee Investment Savings Account, marketed as EISA, was a $300 million ponzi scheme orchestrated by Louis Pearlman, CEO of a air-charter service in Orlando who became famous in the 1990s for launching a number of boy bands, inclluding *NSYNC and the Backstreet Boys. The Transcontinental Airlines Employee Investment Savings Account promised above-market rates of return with investments 100% insured. Helen Huntley wrote an excellent article about EISA on Dec. 17, 2006 in the Tampa Bay Times. Louis Pearlman was sentenced to 25 years in prison on May 21, 2008 for operating the alleged ponzi scheme for two decades.

The DOL has not announced if it plans to file similar lawsuits against other plan sponsors or fiduciaries who invested plan assets in the Transcontinental Airlines Employee Investment Savings Account.

The Dept. of Justice successfully prosecuted four individuals for conspiracy to commit mail fraud, interstate transportation of securities and money taken by fraud and causing interstate travel in execution of a scheme to defraud related to their sales of investments in EISA. On Dec. 8, 2011, three of those individuals were sentenced to 36 months in federal prison, and one individual was sentenced to 26 months in federal prison.

Musings About the DOL’s Fiduciary Hearings

Sometimes the thing is not what you want it to be but it is what it is.  Two months ago, the Dept. of Labor Employee Benefits Security Administration (DOL EBSA) held hearings on the new proposed regulations on the Definition of the Term “Fiduciary”.   

The hearings started on March 1, 2011, with a reminder that “ERISA provides a simple statutory test for determining who is a fudicary by reason of providing investment advice.  Under this test, a person is a fiduciary if he or she renders advice for a fee or other compensation, direct or indirect, with respect to any monies or any other property of the plan.”  This test is from ERISA section 3(21)(A), which the IRS mirrored in Internal Revenue Code section 4975(e)(3). 

ERISA section 3(21)(A) states

“a person is a fiduciary with respect to a plan to the extent:

1.  he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,

2.  he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility or discretionary responsibility in the administration of such plan.  Such person includes any person designated under section 405(c)(1)(B), 29 USC 1105(c)(1)(B) (named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities (other than trustee responsibilities) under the plan).”

Several months after ERISA was signed into law in 1974, the DOL issued regulations interpreting ERISA section 3(21)(A) - Labor Reg. 2510.3-21(c).      It provided a 5-part test to determine when a person is to be treated as a fiduciary because they render investment advice.  That 5-pat test, as stated in the DOL”s 2010 proposed fiduciary reg, is:

“For advice to constitute “investment advice”, an adviser who does not have discretionary authority or control with respect to the purchase or sale of securities or other property for the plan must -

1.  Render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing or selling securities or other property

2.  On a regular basis

3.  Pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary, that

4.  The advice will serve as a primary basis for investment decisions with respect to plan assets, and that

 5.  The advice will be individualized based on the particular needs of the plan.

This was the standard for 35 years.  It was not perfect but everyone knew what the rules were when it came to determining who was a fiduciay for plan purposes. 

In 2010, the DOL, in response to the recent Executive Order which directed all agencies to review all regulatory and other guidance to see whether the regs are still useful and valid, issued the new proposed regulation on the Definition of the Term “Fiduciary.  

If the size of the response to the change is any indication of the impact of the change, then these regulations are expected to have a large impact.  In response to this proposed regulation redefining who is a fiduciary for plan purposes, the DOL states that it received 200 comment letters and 38 requests to testify at the hearings.

We’ve included a redline edition comparing the current definition of the term fiduciary from Labor Reg. 2510.3-21(c) to the new Oct. 2010 proposed definition the term fiduciary in our library.