[Federal Register Volume 59, Number 120 (Thursday, June 23, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15162]


[[Page Unknown]]

[Federal Register: June 23, 1994]


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Part III





Department of Labor





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Pension and Welfare Benefits Administration



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29 CFR Part 2509




Interpretive Bulletin Relating to the Employee Retirement Income 
Security Act of 1974; Rule
DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2509

[Interpretive Bulletin 94-1]

 
Interpretive Bulletin Relating to the Employee Retirement Income 
Security Act of 1974

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Interpretive bulletin.

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SUMMARY: This document sets forth the view of the Department of Labor 
(the Department) concerning the legal standard imposed by sections 403 
and 404 of Part 4 of Title I of the Employee Retirement Income Security 
Act of 1974 (ERISA) with respect to a plan fiduciary's decision to 
invest plan assets in ``economically targeted investments'' (ETIs). 
ETIs are generally defined as investments that are selected for the 
economic benefits they create in addition to the investment return to 
the employee benefit plan investor. In this document, the Department 
states that the requirements of sections 403 and 404 do not prevent 
plan fiduciaries from deciding to invest plan assets in an ETI if the 
ETI has an expected rate of return that is commensurate to rates of 
return of alternative investments with similar risk characteristics 
that are available to the plan, and if the ETI is otherwise an 
appropriate investment for the plan in terms of such factors as 
diversification and the investment policy of the plan.

EFFECTIVE DATE: January 1, 1975.

FOR FURTHER INFORMATION CONTACT:
Morton Klevan or S. John Ryan, Pension and Welfare Benefits 
Administration, U.S. Department of Labor, Washington, DC 20210, 
telephone (202) 219-9044 or (202) 219-8671 or William W. Taylor, Esq., 
Plan Benefits Security Division, Office of the Solicitor, U.S. 
Department of Labor, Washington, DC 20210, telephone (202) 219-4592. 
These are not toll-free numbers.

SUPPLEMENTARY INFORMATION: In order to provide a concise and ready 
reference to its interpretations of ERISA, the Department publishes its 
interpretive bulletins in the Rules and Regulations section of the 
Federal Register. Published in this issue of the Federal Register is 
ERISA Interpretive Bulletin 94-1, which clarifies that under ERISA a 
plan fiduciary may invest plan assets in an ``economically targeted 
investment'' (ETI) provided the fiduciary determines that such 
investment is appropriate for the plan in terms of the same factors 
that a prudent fiduciary would use in determining whether any other 
type of investment is appropriate for the plan. The Department is 
publishing this interpretive bulletin because it believes there is a 
need to summarize and clarify the guidance which it has provided 
regarding the fiduciary standards applicable to plan investments 
generally and to investments in ETIs specifically.

(Sec. 505, Pub. L. 93-406, 88 Stat. 894 (29 U.S.C. 1135))

Background

    Several recent articles and reports have indicated that a 
perception exists within the investment community that investments in 
ETIs are incompatible with ERISA's fiduciary obligations.\1\ In order 
to eliminate this misperception, the Department is issuing this 
interpretative bulletin to set forth its understanding of the term ETI, 
and to clarify its position regarding the application of the fiduciary 
provisions of Part 4 of Title I of ERISA to a decision to invest in an 
ETI.
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    \1\Financing the Future, Report of the Commission to Promote 
Investment in America's Infrastructure, Feb. 1993; Report of the 
Work Group on Pension Investments, Advisory Council on Employee 
Welfare and Pension Benefit Plans, Nov. 1992, p. 19; Maria O'Brien 
Hylton, Socially Responsible Investing: Doing Good Versus Doing Well 
in an Inefficient Market, 42 Am. U.L. Rev. 1 (1992).
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    As used in this interpretive bulletin, an ETI is an investment that 
is selected for the economic benefit it creates, in addition to the 
investment return to the employee benefit plan investor. ETIs fall 
within a wide variety of asset categories, including real estate, 
venture capital and small business investments. Although some of these 
asset categories may require a longer time to generate significant 
investment returns, may be less liquid and may not have as much readily 
available information on their risks and returns as other asset 
categories, nothing in ERISA precludes trustees and investment managers 
from considering ETIs in constructing plan portfolios. While some of 
these asset categories may require special expertise to evaluate, they 
may be attractive to sophisticated, long-term investors, including many 
pension plans.
    The Department has issued a number of letters concerning a 
fiduciary's ability to consider the collateral effects of an 
investment.\2\ The Department has also granted a variety of prohibited 
transaction exemptions to both individual plans and pooled investment 
vehicles involving investments which produce collateral benefits.\3\ 
These letters and exemptions illustrate circumstances under which 
fiduciaries may consider collateral benefits when investing plan 
assets.
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    \2\See, letters from the Department of Labor to Mr. John Kenney, 
dated June 3, 1980 (A.O. 80-33A); to Mr. George Cox, dated January 
16, 1981; to Mr. Theodore Groom, dated January 16, 1981; to The 
Trustees of the Twin City Carpenters and Joiners Pension Plan, dated 
May 19, 1981; to Mr. William Chadwick, dated July 21, 1982; to Mr. 
Daniel O'Sullivan, dated August 2, 1982; to Mr. Ralph Katz; dated 
March 15, 1982 and October 23, 1985 (A.O. 85-36A); to Mr. William 
Ecklund, dated December 18, 1985, and January 16, 1986; to Mr. Reed 
Larson, dated July 14, 1986; to Mr. James Ray, dated July 8, 1988; 
to Mr. Gregory Ridella, dated December 19, 1988 (A.O. 88-16A); to 
the Honorable Jack Kemp, dated November 23, 1990; and to Mr. Stuart 
Cohen, dated May 14, 1993.
    \3\See, PTE 76-1, part B, concerning construction loans by 
multiemployer plans; PTE 84-25, issued to the Pacific Coast Roofers 
Pension Plan; PTE 85-58, issued to the Northwestern Ohio Building 
Trades and Employer Construction Industry Investment Plan; PTE 87-
20, issued to the Racine Construction Industry Pension Fund; PTE 87-
70, issued to the Dayton Area Building and Construction Industry 
Investment Plan, PTE 88-96, issued to the Real Estate for American 
Labor A Balcor Group Trust; PTE 89-37, issued to the Union Bank; PTE 
93-16, issued to the Toledo Roofers Local No. 134 Pension Plan and 
Trust, et al.
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    In responding to these various opinion requests, the Department has 
established certain broad principles. The Department has stated that 
arrangements designed to bring areas of investment opportunity which 
provide collateral benefits to the attention of plan fiduciaries will 
not in and of themselves violate sections 403 or 404, where the 
arrangements do not restrict the exercise of the fiduciary's investment 
discretion. For example, in Advisory Opinion 88-16A, the Department 
considered an arrangement whereby a company and union proposed to make 
recommendations, for up to 5% of the annual contributions, of 
investments with the potential for providing collateral benefits to 
union members. The Department concluded that the arrangement would not 
be inconsistent with the requirements of sections 403(c) and 404(a)(1) 
of ERISA, where the investment managers having responsibility with 
respect to these recommendations retained exclusive investment 
discretion, and were required to secure, over the long term, the 
maximum attainable total return on investments consistent with the 
principles of sound pension fund management.\4\ Moreover, the 
Department stated that in considering such investments plan fiduciaries 
could be influenced by factors that were not related to the plan's 
expected investment return, only if such investments were equal or 
superior to alternative available investments.
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    \4\See, letter from the Department of Labor to Mr. Gregory 
Ridella, dated December 19, 1988 (A.O. 88-16A); see also, letters to 
Mr. John Kenney, dated June 3, 1980 (A.O. 80-33A); and to Mr. Stuart 
Cohen, dated May 14, 1993.
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    Similarly, in a case involving the financing of construction 
projects, the Department concluded that participation in an 
organization which presents investment opportunities but does not limit 
the investment alternatives available to the plans, and does not 
obligate the plans to invest in any project presented for 
consideration, does not, in itself, violate any of ERISA's fiduciary 
standards. Moreover, the Department concluded that in enforcing the 
plan's rights after making an investment, the fiduciary could consider 
factors unrelated to the plan's investment return only if, in the 
fiduciary's judgment, the course of action taken would be at least as 
economically advantageous to the plan as any alternative course of 
action.\5\ In other letters, the Department concluded that the 
requirements of sections 403 and 404 do not exclude the consideration 
of collateral benefits in a fiduciary's evaluation of a particular 
investment opportunity. However, existence of such collateral benefits 
may be decisive in evaluating an investment only if the fiduciary 
determines that the investment containing the collateral benefits is 
expected to provide an investment return to the plan commensurate to 
alternative investments having similar risks.\6\
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    \5\See, letter from the Department to Mr. George Cox, dated 
January 16, 1981.
    \6\See, letters from the Department of Labor to Mr. Theodore 
Groom, dated January 16, 1981; to Mr. Daniel O'Sullivan, dated 
August 2, 1982; to Mr. James Ray, dated July 8, 1988; and to Mr. 
Stuart Cohen, dated May 14, 1993.
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    While the Department has stated that a plan fiduciary may consider 
collateral benefits in choosing between investments that have 
comparable risks and rates of return, it has consistently held that 
fiduciaries who are willing to accept expected reduced returns or 
greater risks to secure collateral benefits are in violation of 
ERISA.\7\ It follows that, because every investment necessarily causes 
a plan to forgo other investment opportunities, an investment will not 
be prudent if it would provide a plan with a lower expected rate of 
return than available alternative investments with commensurate degrees 
of risk or is riskier than alternative available investments with 
commensurate rates of return.
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    \7\See, letters from the Department of Labor to the Trustees of 
the Twin City Carpenters and Joiners Pension Plan, dated May 19, 
1981; to Mr. William Ecklund, dated December 18, 1985, and January 
16, 1986; to Mr. Reed Larson, dated July 14, 1986; and to the 
Honorable Jack Kemp, dated November 23, 1990. Also note, that in 
letters to Mr. Ralph Katz, dated March 15, 1982 and October 23, 1985 
(A.O. 85-36A), the Department held that increases to plan assets 
obtained from an increased contribution level, or other collateral 
benefits could not be added to the investment return of the plan's 
investment. Thus, for comparison purposes, the economic evaluation 
of the investment is limited to its actual return.
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    The following interpretive bulletin deals solely with the 
applicability of the prudence and exclusive purpose requirements of 
ERISA as applied to fiduciary decisions to invest plan assets in ETIs. 
The bulletin does not supersede the regulatory standard contained at 29 
CFR 2550.404a-1, nor does it address any issues which may arise in 
connection with the prohibited transaction provisions or the statutory 
exemptions from those provisions.

List of Subjects in 29 CFR Part 2509

    Employee benefit plans, Pensions.

    For the reasons set forth in the preamble, Part 2509 of Title 29 of 
the Code of Federal Regulations is amended as follows:

PART 2509--INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE 
RETIREMENT INCOME SECURITY ACT OF 1974

    1. The authority citation for part 2509 is revised to read as 
follows:

    Authority: 29 U.S.C. 1135. Section 2509.75-1 is also issued 
under 29 U.S.C. 1114. Sections 2509.75-10 and 2509.75-2 also issued 
under 29 U.S.C. 1052, 1053, 1054. Secretary of Labor's Order No. 1-
87 (52 FR 13139).

    2. Part 2509 is amended by adding a new Sec. 2509.94-1 to read as 
follows:


Sec. 2509.94-1  Interpretive Bulletin relating to the fiduciary 
standard under ERISA in considering economically targeted investments.

    This Interpretive Bulletin sets forth the Department of Labor's 
interpretation of sections 403 and 404 of the Employee Retirement 
Income Security Act of 1974 (ERISA), as applied to employee benefit 
plan investments in ``economically targeted investments'' (ETIs), that 
is, investments selected for the economic benefits they create apart 
from their investment return to the employee benefit plan. Sections 403 
and 404, in part, require that a fiduciary of a plan act prudently, and 
to diversify plan investments so as to minimize the risk of large 
losses, unless under the circumstances it is clearly prudent not to do 
so. In addition, these sections require that a fiduciary act solely in 
the interest of the plan's participants and beneficiaries and for the 
exclusive purpose of providing benefits to their participants and 
beneficiaries. The Department has construed the requirements that a 
fiduciary act solely in the interest of, and for the exclusive purpose 
of providing benefits to, participants and beneficiaries as prohibiting 
a fiduciary from subordinating the interests of participants and 
beneficiaries in their retirement income to unrelated objectives.
    With regard to investing plan assets, the Department has issued a 
regulation, at 29 CFR 2550.404a-1, interpreting the prudence 
requirements of ERISA as they apply to the investment duties of 
fiduciaries of employee benefit plans. The regulation provides that the 
prudence requirements of section 404(a)(1)(B) are satisfied if (1) the 
fiduciary making an investment or engaging in an investment course of 
action has given appropriate consideration to those facts and 
circumstances that, given the scope of the fiduciary's investment 
duties, the fiduciary knows or should know are relevant, and (2) the 
fiduciary acts accordingly. This includes giving appropriate 
consideration to the role that the investment or investment course of 
action plays (in terms of such factors as diversification, liquidity 
and risk/return characteristics) with respect to that portion of the 
plan's investment portfolio within the scope of the fiduciary's 
responsibility.
    Other facts and circumstances relevant to an investment or 
investment course of action would, in the view of the Department, 
include consideration of the expected return on alternative investments 
with similar risks available to the plan. It follows that, because 
every investment necessarily causes a plan to forgo other investment 
opportunities, an investment will not be prudent if it would be 
expected to provide a plan with a lower rate of return than available 
alternative investments with commensurate degrees of risk or is riskier 
than alternative available investments with commensurate rates of 
return.
    The fiduciary standards applicable to ETIs are no different than 
the standards applicable to plan investments generally. Therefore, if 
the above requirements are met, the selection of an ETI, or the 
engaging in an investment course of action intended to result in the 
selection of ETIs, will not violate section 404(a)(1) (A) and (B) and 
the exclusive purpose requirements of section 403.

    Signed at Washington, DC, this 17th day of June 1994.
Olena Berg,
Assistant Secretary, Pension and Welfare Benefit Administration, U.S. 
Department of Labor.
[FR Doc. 94-15162 Filed 6-22-94; 8:45 am]
BILLING CODE 4510-29-M