The Congress that enacted ERISA expressly contemplated that plans be permitted to make investments with a view to their collateral economic benefits. The ERISA Conference Report, in its gloss on the criteria for granting administrative exemptions, stated the following:

[T]he conferees recognize that some individual transactions
between a plan and party-in-interest may provide substantial
independent safeguards for the plan participants and
beneficiaries and may provide substantial benefit to the

community as a whole, so that the transaction should be allowed
under a variance. For example, it is understood that the pension
plan of a major corporation with its principal office in Dayton,
Ohio, has become committed to invest in a joint venture that
will own an office building in a downtown redevelopment area
in Dayton. This building is to be a key element of the
redevelopment project.

Under this transaction, each party in the joint venture is to share
in profits and losses in proportion to its capital contribution.
Therefore, this is not a "tax shelter" transaction with an
attempted shift of early period losses away from a tax-exempt
entity to taxable entities. Also, it is understood that while the
joint venture will borrow to finance the acquisition of the
building, neither the joint venture nor the plan (nor any other
joint venturer) is to be "personally liable" on the mortgage debt.
Therefore, if the transaction were to fail, the plan's liability
would be limited to the funds advanced to the joint venture.

It is expected that in this situation, because of the substantial
safeguards for the plan and its participants and beneficiaries,
because of the lack of "tax abuse" aspects, because the
transaction became binding before the conferees' re-decisions
were announced, and because of the importance of the project to
the entire community of Dayton, Ohio, that the Secretary of the
Treasury and Secretary of Labor will grant a variance to the
transaction for its whole term.

(Emphasis added.) H.R. Rep. No. 93-1280, 93rd Cong., 2nd Sess. 310 (1974). Despite the substantial safeguards built into the transaction to assure its prudence, there would have been no point in urging the Department to grant an administrative exemption for this transaction, which had clearly been selected in part for its collateral economic benefits, if the transaction would be per se violation of the exclusive purpose requirement.

ERISA's exclusive purpose requirement is related to a similar requirement in the
Internal Revenue Code. Section 401(a) of the IRC requires that trusts forming part of
a pension plan be "for the exclusive purpose of [the employer's] employees and their
beneficiaries. Section 401(a)(2) also requires that the instruments of such trusts
make it impossible for any part of the corpus or income of the trust to be "used for,
or diverted to, purposes other than for the exclusive benefit of [the employer's]
employees or their beneficiaries.

These provisions pre-date ERISA, and in 1969, the IRS issued Revenue Ruling 69494, 1969-2 C.B. 88., which states in pertinent part:

The primary purpose of benefitting employees or their
beneficiaries must be maintained with respect to investments of
the trust funds as well as with respect to other activities of the
trust. This requirement, however, does not prevent others from
also deriving some benefit from a transaction with the trust.'

The revenue ruling, which specifically involved employer stock, sets forth four
requisites applicable for investments to meet the exclusive benefit standard under
section 401(a) of the Code:

(1) the cost must not exceed fair market value at the time;

(2) a fair return commensurate with the prevailing rate must be
provided;

(3) sufficient liquidity must be maintained to permit distributions
in accordance with the terms of the plan; and

(4) the safeguards and diversity that a prudent investor would
adhere to must be present.

The ERISA Conference Report, in discussing the prudence standard, referred to the above-cited Code requirements and revenue ruling. H. Rep. No. 93-1280, 93d Cong., 2nd Sess. 302 (1974). The Conference report stated the intention that compliance with ERISA's prudence requirements would constitute compliance with the Code's exclusive benefit requirement.2

1 IRS Revenue Ruling 69-494 restates and supersedes the position of that agency as expressed in a Pension Trust Service Ruling (PS No. 49), a document issued on June 6, 1945.

2

Subsequently, in OBRA '87, Congress determined that Titles I and IV of ERISA were not applicable in interpreting the Code. Pub. L. No. 100-2203, § 9343, 101

In several advisory opinions and other letters issued over the period from 1980 to 1993, the Department has taken the position that a fiduciary can choose, on the basis of non-economic considerations, between two alternatives that were economically equally advantageous to the plan. See Letters collected in the preamble to Interpretive Bulletin 94-1, 59 Fed. Reg. 32606 n. 2. (copies attached). The Department has said that a fiduciary may not be influenced by a desire to stimulate the construction industry and generate employment, unless the investment, when judged solely on the basis of its economic value to the plan, would be equal or superior to the alternative investments available to the plan. Letter from the Department to Theodore Groom, dated Jan. 16, 1981.

Please explain the extent to which the interpretations in the Bulletin are based upon sources other than rulings and communications having the effect of law, such as opinion letters and advisory opinions.

2.

The letters collected in note 2 in the preamble of the Interpretive Bulletin represent the Department's interpretation of existing law. As such, they support the Department's legal position contained in the Bulletin. Also, they provide the historical background that shows that the bulletin reiterates a consistent position that the Department has articulated in one form or another over the last 15 years.

The Secretary of Labor has stated that investing in "economically targeted investments" (hereinafter "ETIs") is not "social investing". Please define precisely the characteristics that are necessary for an investment of an ERISA employee benefit plan to be considered the result of "social investing".

The term "social investing", in many circles, has come to mean investments that involve the sacrifice of financial return or the acceptance of increased risk in order to create a benefit for a segment or segments of society. The Department has consistently stated that social investing, as defined above, violates the exclusive purpose and prudence requirements of ERISA. In some cases, it may also constitute a prohibited transaction.

If a plan fiduciary were to make a loan to achieve a social goal such that (1) the terms of the loan were not as favorable to the plan as what the plan could achieve in alternative investments, (2) the loan would cause a lack of diversification in the plan's investments, or (3) the loan was otherwise inappropriate for the plan in terms of other financial factors such as the plan's liquidity needs, then we would regard the loan as

Stat. 1330-372 (1987).

3.

the result of social investing. The social utility of the investment would not be considered by the Department in determining whether a given transaction has passed muster pursuant to ERISA §§ 403(c)(1) and 404(a)(1)(A) and (B).

(A) Is the Department aware of any ETIs invested in by ERISA employee benefit plans? If yes, please provide the Committee with a description of each such investment.

(B)

As described more fully in our answer to question 1, ETIs are not a separate investment category and there is no separate reporting. An investment is an ETI if the investor has considered collateral benefits in addition to the expected risk adjusted investment return to the plan. Because this description covers many thousands of transactions, it is not feasible to respond fully to the committee's request. However, our discussion in response to item B below will give some indication of investments which appear to involve a consideration of collateral benefits.

With respect to each such investment, please describe the extent to which it involved a prohibited transaction, and whether the Department of Labor has issued a prohibited transaction exception in connection with such investment. If such an investment was granted, please describe the relevant facts involved, including the type of transaction, the parties-in-interest involved, the type of plan or fund, the amount involved, and the basis for the exemption.

Among prohibited transaction investments which involve a collateral benefit for which there is a statutory exemption are the following:

(1) loans or guarantees of loans from plan sponsors and other parties in
interest to an ESOP to allow it to buy stock from the employer corporation or
the principal owners of the employer. Section 408(b)(3) of ERISA provides an
exemption for such a loan, provided that it "is primarily for the benefit of
participants and beneficiaries of the plan." This recognizes that ESOP loans
are also used as a method of corporate finance and may also be for the benefit
of third parties.

(2) investments by bank and insurance company plans of plan assets in the
deposits of the sponsoring bank or insurance product of the sponsoring
insurance company, respectively. These prohibited transactions, which
provide a collateral benefit to the plan sponsor, are exempt under sections
408(b)(4) and 408(b)(5) of ERISA. The conference report accompanying
ERISA recognized that it would be "contrary to normal business practice" to
require the plans of banks and insurance companies to invest in the products of
their direct competitors.

With respect to administrative exemptions, many exemption requests previously considered by the Department, which numbered 9,930 as of May 31, 1995, proposed to provide benefits to the employer sponsoring the plan or another related party, in addition to the benefits conferred upon the plan. Of the 9,930 requests considered by the Department, the number of applications denied and withdrawn as not meeting the standards for safeguarding the interests of plans and their participants totalled 6,835. We have examined materials covering the past twenty years, some of which are excerpted below. However, the following is a sample of class and individual exemptions granted which confer collateral benefits on parties related to the plan or plans involved:

Class Exemptions:

PTCE 76-1

Class Exemption Regarding Certain Transactions in Which Multiemployer and
Multiple Employer Plans are Involved

Proposal Published

Grant Published

June 2, 1975
March 26, 1976

40 FR 23798

41 FR 12740

This Class Exemption permits, among other things, multiple employer plans to make construction loans to participating employers, and also permits the leasing of office space or the provision of administrative services, or the sale of leasing of goods by a multiple employer plan to a participating employee organization, participating employer, or participating employer association or to another multiple employer plan.

Construction loans may be made to participating employers only if, among other safeguards, the decision to make the loans is made on behalf of the plan by a bank, insurance company, or savings and loan association, and neither the participating employer, the employee organization or any of its members, have the power to exercise a controlling influence over the management or policies of such bank, insurance company or savings and loan association. In addition, the bank, insurance company, or savings and loan association must make similar loans from its own funds, and each plan loan must satisfy the institution's qualifications for making loans with its own funds. Further, before a loan is made, the participating employer must have a written commitment for permanent financing from a person other than the plan to enable full repayment of the construction loan.

In terms of collateral benefits, the applicant stated that Multiemployer plans covering employees in the building and construction trades have traditionally invested a portion of their assets in construction loans in order to provide work opportunities for plan participants.

With regard to the leasing of office space or the provision of administrative services, or the sale or leasing of goods, the multiple employer plan must receive reasonable compensation, and the arrangement must allow the plan to terminate the relationship on a reasonably short notice under the circumstances. This condition is designed to preclude