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.

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 ETT 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.' 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.

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. The Department has also

'Financing the Future. Report of the Commission 1 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).

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. Danie O'Sullivan, dated August 2, 1982: to Mr. Ralph Katz: dated March 15, 1982 and October 23, 1985

granted a variety of prohibited transaction exemptions to both individual plans and pooled investment vehicles involving investments which produce collateral benefits. These letters and exemptions illustrate circumstances under which fiduciaries may consider collateral benefits when investing plan assets.

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. 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

(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.

'See, PTE 76-1. part B, concerning construction loans by multiemployer plans; PTE 84-25, issued to the Pacific Coast Roofers Pension Plan: PTE 8558. 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.

See, letter from the Department of Labor to Mr. Gregory Ridella, dated December 19, 1988 (A.O. 8816A): see also, letters to Mr. John Kenney, dated June 3. 1980 (A.O. 80-33A); and to Mr. Stuart Cohen, dated May 14. 1993.

investments were equal or superior to alternative available investments.

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." 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.

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. 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

*Ser. letter from the Department to Mr. George Cox, dated January 16, 1981.

* See. letters from the Department of Labor to Mr. Theodore (room, 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.

"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.

return than available alternative investments with commensurate degrees of risk or is riskier than alternative available investments with commensurate rates of return.

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 2550.4048-1, 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 § 2509.94-1 to read as follows:

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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.

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

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.