[Federal Register Volume 62, Number 245 (Monday, December 22, 1997)]
[Proposed Rules]
[Pages 66908-66920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33088]
[[Page 66907]]
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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 2550
Insurance Company General Accounts; Proposed Rule
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 /
Proposed Rules
[[Page 66908]]
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
29 CFR Part 2550
RIN 1210-AA58
Insurance Company General Accounts
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains a proposed regulation which clarifies
the application of the Employee Retirement Income Security Act of 1974
as amended (ERISA or the Act) to insurance company general accounts.
Pursuant to section 1460 of the Small Business Job Protection Act of
1996 (Pub. L. 104-188), section 401 of ERISA has been amended. Section
401 now provides that the Department must issue proposed regulations
to: Provide guidance for the purpose of determining, where an insurer
issues one or more policies to or for the benefit of an employee
benefit plan (and such policies are supported by assets of the
insurer's general account), which assets held by the insurer (other
than plan assets held in its separate accounts) constitute assets of
the plan for purposes of part 4 of Title I of ERISA and section 4975 of
the Internal Revenue Code of 1986 (the Code); and provide guidance with
respect to the application of Title I to the general account assets of
insurers. If adopted, the regulation will affect participants and
beneficiaries of employee benefit plans, plan fiduciaries and insurance
company general accounts.
DATES: Written comments and requests for a hearing (preferably at least
three copies) concerning the proposed regulation must be received by
March 23, 1998.
ADDRESSES: Interested persons are invited to submit written comments
(preferably, at least three copies) concerning the proposed rule to:
Pension and Welfare Benefits Administration, Office of Exemption
Determinations, Room N-5649, 200 Constitution Ave., N.W., Washington,
DC 20210. Attention: ``General Account Contracts''. Written comments
may also be sent by the Internet to the following address:
cmpad@jpwba.dol.gov.
FOR FURTHER INFORMATION CONTACT: Lyssa E. Hall, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5649, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210, (202) 219-8194, or Timothy Hauser, Plan
Benefits Security Division, Office of the Solicitor, (202) 219-8637.
These are not toll-free numbers.
SUPPLEMENTARY INFORMATION:
A. Background
Life insurance companies issue a variety of group contracts for use
in connection with employee pension benefit plans, some of which
provide benefits the amount of which is guaranteed, some of which
provide benefits that may fluctuate with the investment performance of
the insurance company, and some of which offer elements of both. Under
section 401(b)(2) of ERISA, if an insurance company issues a
``guaranteed benefit policy'' to a plan, the assets of the plan are
deemed to include the policy, but do not, solely by reason of the
issuance of the policy, include any of the assets of the insurance
company. Section 401(b)(2)(B) defines the term ``guaranteed benefit
policy'' to mean an insurance policy or contract to the extent that
such policy or contract provides for benefits the amount of which is
guaranteed by the insurer. In addition, in paragraph (b) of ERISA
Interpretive Bulletin 75-2, 29 CFR 2509.75-2 (1975), the Department
stated that if an insurance company issues a contract or policy of
insurance to a plan and places the consideration for such contract or
policy in its general asset account, the assets in such account shall
not be considered to be plan assets.1
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\1\ Paragraph (b) of 29 CFR 2509.75-2 was removed effective July
1, 1996, 61 FR 33847, 33849 (July 1, 1996).
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On December 13, 1993, the Supreme Court rendered its decision in
John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank,
510 U.S. 86 (1993) (Harris Trust) which interpreted the meaning of
``guaranteed benefit policy''. In its decision, the Court held that a
contract qualifies as a guaranteed benefit policy only to the extent it
allocates investment risk to the insurer:
[w]e hold that to determine whether a contract qualifies as a
guaranteed benefit policy, each component of the contract bears
examination. A component fits within the guaranteed benefit policy
exclusion only if it allocates investment risk to the insurer. Such
an allocation is present when the insurer provides a genuine
guarantee of an aggregate amount of benefits payable to retirement
plan participants and their beneficiaries.
Therefore, under the Supreme Court's decision, an insurer's general
account includes plan assets to the extent it contains funds which are
attributable to any nonguaranteed components of contracts with employee
benefit plans. Because John Hancock's contract provided for a return
that varied with the insurer's investment performance, the Court
concluded that John Hancock held plan assets, and was, therefore, a
fiduciary with respect to the management and disposition of those
assets. Under the Court's reasoning, a broad range of activities
involving insurance company general accounts are subject to ERISA's
fiduciary standards.
Because of the retroactive effect of the Supreme Court decision,
numerous transactions engaged in by insurance company general accounts
may have violated ERISA's prohibited transaction and general fiduciary
responsibility provisions. If the underlying assets of a general
account include plan assets, persons who have engaged in transactions
with such general account may be viewed as parties in interest under
section 3(14) of ERISA and disqualified persons under section 4975 of
the Code, including fiduciaries with respect to plans which have
interests as policyholders in the general account. For example,
insurance companies are a source of loans for smaller and mid-sized
companies. Many of these companies have party in interest relationships
with plans that have purchased general account contracts. Application
of the prohibited transaction rules to the general account of an
insurance company as a result of the Harris Trust decision could call
such loans into question under ERISA. Lastly, the underlying assets of
an entity in which a general account acquired an equity interest may
include plan assets as a result of the Harris Trust decision.
The insurance industry believed that, absent legislative or
administrative action, it would be subject to significant additional
litigation and potential liability with respect to the operation of its
general accounts. On March 25, 1994, the American Council of Life
Insurance (ACLI) submitted an application for a class exemption from
certain of the restrictions of sections 406 and 407 of ERISA and from
certain excise taxes imposed by section 4975(a) and (b) of the Code.
The ACLI requested broad exemptive relief for transactions which
included the following: all internal operations of general accounts,
all investment transactions involving general account assets, including
transactions with parties in interest with respect to plans that have
purchased general account contracts, and the purchase by the general
account of securities issued by, and real property leased to, employers
of employees
[[Page 66909]]
covered by plans that have purchased general account contracts.
On August 22, 1994, the Department published a notice of proposed
Class Exemption for Certain Transactions Involving Insurance Company
General Accounts. (59 FR 43134). Although the ACLI requested exemptive
relief for activities in connection with the internal operation of
general accounts, the Department determined that it did not have
sufficient information regarding the operation of such accounts to make
the findings required by section 408(a) of ERISA. Accordingly, the
proposed class exemption did not provide relief for transactions
involving the internal operation of an insurance company general
account. The final exemption (Prohibited Transaction Exemption (PTE)
95-60, 60 FR 35925), was published in the Federal Register on July 12,
1995.
B. Public Law 104-188
In response to the Supreme Court decision in Harris Trust, Congress
amended section 401 of ERISA by adding a new subsection 401(c) which
clarifies the application of ERISA to insurance company general
accounts. Pub. L. 104-188, Sec. 1460. This statutory provision provides
that the Secretary shall issue proposed regulations to provide guidance
for the purpose of determining, in cases where an insurer issues one or
more policies to or for the benefit of an employee benefit plan (and
such policies are supported by the assets of such insurer's general
account), which assets held by the insurer (other than plan assets held
in its separate accounts) constitute assets of the plan for purposes of
part 4 of Title I and section 4975 of the Code and to provide guidance
with respect to the application of Title I to an insurer's general
account assets. The final regulations shall be issued not later than
December 31, 1997.
The regulations will only apply to those general account policies
which are issued by an insurer on or before December 31, 1998. In the
case of such policies, the regulations will take effect at the end of
the 18 month period following the date on which the regulations become
final. Pub. L. 104-188, however, authorizes the Secretary to issue
additional regulations designed to prevent avoidance of the regulations
described above. These additional regulations, if issued, may have an
earlier effective date.
The Department must ensure that the regulations issued under Pub.
L. 104-188 are administratively feasible, and protect the interests and
rights of the plan and of its participants and beneficiaries. In
addition, the regulations must require, in connection with any policy
(other than a guaranteed benefit policy) issued by an insurer to or for
the benefit of an employee benefit plan, that: (1) An independent plan
fiduciary authorize the purchase of the policy (unless the purchase is
exempt under ERISA section 408(b)(5)); (2) the insurer provide
information in policies issued and on an annual basis to policyholders
(as prescribed in such regulations) disclosing the methods by which any
income and expenses of the insurer's general account are allocated to
the policy and the actual return to the plan under the policy and such
other financial information as the Department determines is
appropriate; (3) the insurer disclose to the plan fiduciary the extent
to which alternative arrangements supported by the assets of the
insurer's separate accounts are available, whether there is a right
under the policy to transfer funds to a separate account and the terms
governing any such right, and the extent to which support by assets of
the insurer's general account and support by assets of the insurer's
separate accounts might pose differing risks to the plan; and (4) the
insurer manage general account assets prudently, taking into account
all obligations supported by such general account.
Compliance with the regulations issued by the Department will be
deemed compliance by such insurer with sections 404, 406 and 407 of
ERISA. In addition, under this statutory provision, no person will be
liable under part 4 of Title I or Code section 4975 for conduct which
occurred before the date which is 18 months following the issuance of
the final regulation on the basis of a claim that the assets of an
insurer (other than plan assets held in a separate account) constitute
plan assets. The limitation on liability is subject to three
exceptions: (1) The Department may circumscribe this limitation on
liability in regulations intended to prevent avoidance of the
regulations which it is required to issue under the statutory
amendment; (2) the Department may bring actions pursuant to paragraph
(2) or (5) of section 502(a) of ERISA for breaches of fiduciary
responsibility which also constitute violations of Federal or State
criminal law; and (3) civil actions commenced before November 7, 1995
are exempt from the amendment's coverage.
On November 25, 1996, the Department published a Request for
Information (RFI) to solicit information and comments from the public
to be considered by the Department in developing the regulations
mandated by Pub. L. 104-188. The RFI contained a list of questions
designed to elicit information that would be helpful to the Department
in developing this notice of proposed rulemaking.
Discussion of the Comments
The questions asked by the Department in the RFI requested
information regarding disclosures to contractholders, market value
adjustments, unilateral contract amendments, state regulatory
requirements and guaranteed benefit policies.
A total of eight substantive responses to the RFI were received:
one was from the ACLI itself; the remaining comments were from a law
firm representing a group of major life insurance companies, an
organization representing insurance regulators, two law firms
representing plans which have invested in insurance company general
account contracts, an insurance company, an association representing
senior financial executives and an advocacy organization representing
senior citizens.
Disclosures
Many of the comments addressed the need for insurance companies to
provide adequate and meaningful disclosure regarding the financial
soundness of the insurance company, the nature of the insurer's general
account assets, transactions with affiliates and the investment
policies/objectives of the insurer as well as contract specific
information regarding fees, commissions, expenses, termination
requirements, and allocation methodologies.
Several of the commenters stressed that such information must be
presented in ``plain English'' using a format which would be understood
by lay persons. Two commenters suggested that the Department require
that information be supplied in standardized form. Another commenter
stated that the information in the Statutory Annual Statement could be
adapted to provide appropriate disclosures.
A commenter noted that, in order for a plan fiduciary to make a
prudent decision regarding the investment of plan assets in an
insurance company general account contract, the insurance company must
provide the fiduciary with sufficient information. In this regard,
another commenter stated that many general account investments are
tantamount to an illiquid investment in a corporate bond; thus, the
general level of disclosure required should be comparable to that made
available to investors of other illiquid investments. A number of
commenters agreed that
[[Page 66910]]
the items of information identified in the RFI should be disclosed to
plan investors on an annual basis. In addition to those items, a
commenter suggested that the disclosure requirements should recognize
the fact that the general account supports products not covered by
ERISA. Another stated that information regarding the current value of
the investment compared to the purchase price of the contract should be
provided annually. Finally, a commenter noted that gross and net
returns on the contract before and after adjustments should be
reported.
With respect to the effective date of the disclosure provisions in
the regulation, one commenter stated that the disclosure provisions
should become effective prior to the end of the 18th month following
publication of the final regulation.
Market Value Adjustments (MVAs)
Two commenters expressed concern that MVAs may operate as penalties
imposed on plans which terminate or withdraw funds from general account
contracts. They represent that MVAs should not be used to enrich the
insurer, but should be fair to terminating contractholders as well as
remaining contractholders. One commenter suggested that MVAs should
``cut both ways,'' i.e., if market value is above book value, the
terminating policyholders should receive the difference between book
and market value as the adjustment. This commenter stated that MVAs
should be based on regularly published indices that reflect the
categories of investments in the insurer's general account. To the
extent that such adjustments represent lost opportunity costs, the
insurer should be required to articulate a justification for its
estimate of the lost opportunity.
Finally, one commenter stated that MVAs should not be circumscribed
by the Department since they protect remaining contractholders.
Unilateral Contract Amendments
Three commenters either opposed an insurer's ability to
unilaterally amend contract terms or believed that the Department
should impose limits on such amendments. In the alternative, two
commenters suggested that if unilateral amendments are made and the
parties cannot agree on such changes, the matter should be referred to
binding arbitration. Another commenter suggested that the account
holder be permitted to exit the arrangement if the unilateral change
was not satisfactory.
State Regulatory Requirements
Two commenters stated that the Department should not take state
insurance requirements into account in drafting the regulation either
because ERISA should govern employee benefit plans or consideration of
state regulatory requirements would dilute the strength of ERISA.
Another commenter noted that state regulatory requirements either
overlap or address each of the requirements imposed by section 1460 of
Pub. L. 104-188.
Guaranteed Benefit Policies
Two commenters urged the Department to issue a regulation defining
guaranteed benefit policy under section 401(b)(2) of the Act
concurrently with the regulations the Department is required to issue
under section 401(c).2
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\2\ The Department notes that the statute requires the
promulgation of regulations under section 401(c) but does not
require the Department to promulgate regulations defining guaranteed
benefit policies. At this time, the Department has not made a
decision regarding whether to initiate a regulatory project on this
matter. Therefore, this proposed regulation does not address the
definition of guaranteed benefit policy.
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Description of Proposal
The proposal amends 29 CFR Part 2550 by adding a new section,
2550.401c-1. This new section is divided into ten major parts.
Paragraph (a) of the proposal describes the scope of the regulation and
the general rule. Proposed paragraphs (b) through (f) contain
conditions which must be met in order for the general rule to apply.
Specifically, paragraph (b) addresses the requirement that an
independent fiduciary expressly authorize the acquisition or purchase
of a Transition Policy. Paragraph (c) describes the disclosures that an
insurer must make both prior to the issuance of a Transition Policy to
a plan and on an annual basis. Paragraph (d) provides for additional
disclosures regarding separate account contracts. Paragraph (e)
contains the procedures that apply to the termination or discontinuance
of a Transition Policy by a policyholder. Paragraph (f) contains notice
provisions regarding contract terminations and withdrawals in
connection with insurer-initiated amendments. Proposed paragraph (g)
sets forth a prudence standard for the management of general account
assets by insurers. The definitions of certain terms used in the
proposed regulation are contained in paragraph (h). Proposed paragraph
(i) describes the effect of compliance with the regulation and proposed
paragraph (j) contains the effective dates of the regulation.
1. Scope and General Rule
Proposed Sec. 2550.401c-1(a) and (b) essentially follow the
language of section 401(c) of ERISA. Paragraph (a) describes, in cases
where an insurer issues one or more policies to or for the benefit of
an employee benefit plan (and such policies are supported by assets of
an insurance company's general account), which assets held by the
insurer (other than plan assets held in its separate accounts)
constitute plan assets for purposes of Subtitle A, and Parts 1 and 4 of
Subtitle B, of Title I of the Act and section 4975 of the Internal
Revenue Code, and provides guidance with respect to the application of
Title I and section 4975 of the Code to the general account assets of
insurers.
Proposed paragraph (a)(2) states the general rule that when a plan
acquires a policy issued by an insurer on or before December 31, 1998
(Transition Policy), which is supported by assets of the insurer's
general account, the plan's assets include the policy, but do not
include any of the underlying assets of the insurer's general account
if the insurer satisfies the requirements of paragraphs (b) through (f)
of the regulation. The term Transition Policy is defined in paragraph
(h)(6) as a policy or contract of insurance (other than a guaranteed
benefit policy) that is issued by an insurer to, or on behalf of, an
employee benefit plan on or before December 31, 1998, and which is
supported by the assets of the insurer's general account. A policy will
not fail to be a Transition Policy if it is amended solely for the
purposes of complying with the provisions of this regulation.
2. Authorization by an Independent Fiduciary
Proposed paragraph (b)(1) states the general requirement that an
independent fiduciary who has the authority to manage and control the
assets of the plan must expressly authorize the acquisition or purchase
of the Transition Policy. In order to be independent, the fiduciary may
not be an affiliate of the insurer issuing the policy.
Paragraph (b)(2) of the proposed regulation contains an exception
to the requirement of independent plan fiduciary authorization if the
insurer is the employer maintaining the plan, or a party in interest
which is wholly-owned by the employer maintaining the plan,
[[Page 66911]]
and the requirements of section 408(b)(5) of ERISA are met.3
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\3\ This exception for in-house plans of the insurer under
section 401(c)(3) of ERISA is similar to the statutory exemption
contained in section 408(b)(5) of ERISA which provides relief from
the prohibitions of section 406 for purchases of life insurance,
health insurance or annuities from an insurer if the plan pays no
more than adequate consideration and if the insurer is the employer
maintaining the plan.
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3. Disclosure
Section 401(c)(3)(B) of the Act, as added by Pub. L. 104-188,
provides that the regulations prescribed by the Secretary shall require
in connection with any policy issued by an insurer to or for the
benefit of an employee benefit plan to the extent the policy is not a
guaranteed benefit policy * * * (B) that the insurer describe (in such
form and manner as shall be prescribed in such regulations), in annual
reports and in policies issued to the policyholder after the date on
which such regulations are issued in final form * * * (i) a description
of the method by which any income and expenses of the insurer's general
account are allocated to the policy during the term of the policy and
upon termination of the policy, and (ii) for each report, the actual
return to the plan under the policy and such other financial
information as the Secretary may deem appropriate for the period
covered by each such annual report.
Proposed paragraph (c)(1) similarly imposes a duty on the insurer
to disclose specific information to plan fiduciaries prior to the
issuance of a Transition Policy and at least annually for as long as
the policy is outstanding. Proposed paragraph (c)(2) requires that the
disclosures be clear and concise and written in a manner calculated to
be understood by a plan fiduciary. Although the Department has not
mandated a specific format, the information should be presented in a
manner which facilitates the fiduciary's understanding of the operation
of the policy. The Department expects that, following disclosure of the
required information and any other information requested by the
fiduciary pursuant to paragraph (c)(4)(xii), the plan fiduciary, with
independent professional assistance, if necessary, will be able to
ascertain how various values or amounts relevant to the plan's policy
such as, the actual return to be credited to any accumulation fund
under the policy, will be determined.
Paragraph (c)(3) sets forth the content requirement for the
information which must be provided to the plan either as part of the
Transition Policy, or as a separate written document which accompanies
the Transition Policy. For Transition Policies issued before the date
which is 90 days after the date of publication of the final regulation,
the insurer must provide the information identified in paragraph
(c)(3)(i) through (iv) no later than 90 days after publication of the
final regulation. For Transition Policies issued 90 days after the date
of publication of the final regulation, the insurer must provide the
information to a plan before the plan makes a binding commitment to
acquire the policy.
Under paragraph (c)(3), an insurer must provide a description of
the method by which any income and expenses of the insurer's general
account are allocated to the policy during the term of the policy and
upon its termination. The initial disclosure under this paragraph must
include, among other things, a statement of the method used to
determine ongoing fees and expenses that may be assessed against the
policy or deducted from any accumulation fund under the policy. The
term ``accumulation fund'' is defined in paragraph (h)(5) as the
aggregate net consideration (i.e., gross considerations less all
deductions from such considerations) credited to the Transition Policy
plus all additional amounts, including interest and dividends, credited
to the contract, less partial withdrawals and benefit payments and less
charges and fees imposed against this accumulated amount under the
Transition Policy other than surrender charges and market value
adjustments. 4
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\4\ This definition is substantially similar to the definition
contained in New York insurance regulations. In this regard, see 11
NYCRR 40.2 (1996).
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The insurer must also include, in its description of the method
used to allocate income and expenses to the Transition Policy, an
explanation of the method used to determine the return to be credited
to any accumulation fund under the policy, a description of the
policyholder's rights to transfer or withdraw all or a portion of any
fund under the policy, or to apply such amounts to the purchase of
benefits, and a statement of the precise method used to calculate the
charges, fees or market value adjustments that may be imposed in
connection with the policyholder's right to withdraw or transfer
amounts under any accumulation fund. Upon request, the insurer must
provide the information necessary to independently calculate the exact
dollar amounts of charges, fees or market value adjustments.
In developing the proposed regulation, the Department reviewed the
disclosure requirements imposed by New York insurance regulations, and
incorporated several provisions which we believe would be helpful to
plan fiduciaries prior to their commitment to purchase a Transition
Policy. The information disclosed pursuant to this paragraph will
address many of the concerns expressed by the commenters in response to
the RFI regarding the lack of contract-level disclosure by insurers.
The information disclosed pursuant to this paragraph should enable plan
fiduciaries to adequately evaluate the suitability of a particular
policy for a plan.
Proposed paragraph (c)(4) describes the information which must be
provided at least annually to each plan to which a Transition Policy
has been issued. In general, the information is intended to provide the
policyholder with an overview of all the activity that has occurred in
the accumulation fund during the applicable period. These disclosures
should enable the policyholder to evaluate the insurer's performance
under the policy. In this regard, the insurer must provide the
following information to each plan regarding the applicable reporting
period: the balance in the accumulation fund on the first and last day
of the period; any deposits made to the accumulation fund; all income
attributed to the policy or added to the accumulation fund; the actual
rate of return credited to the accumulation fund; any other additions
to the accumulation fund; a statement of all fees, charges or expenses
assessed against the policy or deducted from the accumulation fund; and
the dates on which the additions or subtractions were credited to, or
deleted from, the accumulation fund.
In addition, insurers must annually disclose all transactions with
affiliates which exceed 1 percent of group annuity reserves of the
general account for the prior reporting year. The annual disclosure
must also include a description of any guarantees under the policy and
the amount that would be payable in a lump sum pursuant to the request
of a policyholder for payment of amounts in the accumulation fund under
the policy after deduction of any charges and any deductions or
additions resulting from market value adjustments.
As part of the annual disclosure, an insurer must inform
policyholders that it will make available upon request certain
publicly-available financial information relating to the financial
condition of the insurer. Such
[[Page 66912]]
information would include rating agency reports on the insurer's
financial strength, the risk adjusted capital ratio, an actuarial
opinion certifying to the adequacy of the insurer's reserves and the
insurer's most recent SEC Form 10K and Form 10Q (if a stock company).
The Department believes that the annual disclosures required under
paragraph (c)(4) will provide sufficient information to the plan
fiduciaries to enable them to assess the appropriateness of continuing
the plan's investment in the Transition Policy. The Department's
primary intent in mandating the disclosures under paragraphs (c)(3) and
(4) is to ensure that plan fiduciaries are provided with relevant
information, including the financial strength of the insurer, in an
understandable form in order to make a meaningful, informed decision
regarding both the initial investment in a Transition Policy, and the
advisability of leaving the accumulation fund with the insurer. Lastly,
the information provided by the insurance company with respect to its
allocation methodologies must be in sufficient detail to enable the
policyholder to calculate the expenses charged against the Transition
Policy as well as the income credited to the policy. This information
will allow plan fiduciaries to monitor the actions of the insurer with
respect to the Transition Policy.
The Department solicits comments on the proposed disclosure
requirements and procedures, both as to their usefulness for plans and
the impact on plans and insurers.
It was Congressional intent under section 401(c) of ERISA to
require substantive disclosure from insurance companies in order to
enable plans to effectively monitor the performance of insurance
company general account contracts. In this regard, the Department does
not intend to promulgate regulations which require the disclosure of
proprietary information if Congressional intent for meaningful
disclosure can otherwise be effectuated. Accordingly, the Department
requests comments from interested persons on whether any of the items
of disclosure specified in the proposed regulation would place an
insurer at a competitive disadvantage by giving other insurance
companies access to their proprietary information. In responding to
this request, please specify which items of information would be
considered proprietary and the rationale for that conclusion.
Proposed paragraph (d)(1) contains an additional disclosure
requirement regarding the availability of separate account contracts.
Under this paragraph, the insurer must explain the extent to which
alternative contract arrangements supported by assets of separate
accounts of the insurer are available to plans; whether there is a
right under the policy to transfer funds to a separate account; and the
terms governing any such right. An insurer also must disclose the
extent to which general account contracts and separate account
contracts pose differing risks to the plan. Proposed paragraph (d)(2)
contains a standardized statement describing the relative risks of
separate accounts and general account contracts which, if provided to
policyholders, will be deemed to comply with paragraph (d)(1)(iii) of
the regulation.
4. Termination Procedures
Paragraph (e)(1) of the proposed regulation provides that a
policyholder must be able to terminate or discontinue a policy upon 90
days notice to an insurer. The policyholder must have the option to
select one of two payout alternatives, both of which must be made
available by the insurer.
Under the first alternative, an insurer must permit the
policyholder to receive, without penalty, a lump sum payment
representing all unallocated amounts in the accumulation fund after
deduction of unrecovered expenses and adjustment of the book value of
the policy to its market value equivalency. The Department notes that
for purposes of paragraph (e), the term penalty does not include a
market value adjustment (as defined in proposed paragraph (h)(7)) or
the recovery of costs actually incurred including unliquidated
acquisition expenses, to the extent not previously recovered by the
insurer.
In response to the concerns expressed by some commenters regarding
an insurer's use of market value adjustments as a penalty to a
withdrawing policyholder, the Department has defined the term market
value adjustment to reflect the economic effect on a Transition Policy
of an early termination or withdrawal in the current market. Since the
purpose of the adjustment is to protect the remaining policyholders, it
should represent the economic effect on the policy of a termination
under current economic conditions and not penalize the withdrawing
policyholder.
Under the second alternative, proposed paragraph (e)(2), an insurer
must permit the policyholder to receive a book value payment of all
unallocated amounts in the accumulation fund under the policy in
approximately equal annual installments, over a period of no longer
than five years, with interest.
These termination provisions are designed, in part, ``to protect
the interests and rights of plan[s] * * *'' (See ERISA
Sec. 401(c)(2)(B)) by ensuring that plans are not locked into
economically disadvantageous relationships.5 Under the terms
of the proposed regulation, plan fiduciaries will receive full
disclosure of the general account contract's investment performance,
and have the ability to transfer plan assets from the general account
to other investments. In this manner, the regulation enables plans to
rationally protect their own economic interests without imposing
detailed federal regulations on the day-to-day operation of general
accounts.
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\5\ The proposal is similar to the Department's rule governing
contracts between plans and service providers. See 29 CFR
Sec. 2550.408b-2(c) (providing that ``[n]o contract or arrangement
is reasonable within the meaning of section 408(b)(2) of the Act * *
* if it does not permit termination by the plan without penalty to
the plan on reasonably short notice under the circumstances to
prevent the plan from becoming locked into an arrangement that has
become disadvantageous'').
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The Department recognizes, however, that insurers have a legitimate
interest in avoiding adverse selection and excessive liquidity demands
by plan contractholders. Accordingly, the regulation permits insurers
to impose a market value adjustment on lump sum withdrawals, and
authorizes insurers to spread book value withdrawals over a five-year
period at a rate of interest as much as one percentage point below the
rate credited to the contract's accumulation fund on the date of
termination. Many general account contracts already permit a ten-year
book value withdrawal in accordance with provisions of state law. See,
e.g., 11 NYCRR Sec. 40.5 (1997) (giving contractholders the right to a
ten-year book value withdrawal under specified contracts with interest
at a rate not less than 1.5 percent below the rate credited at the time
of termination). In proposing a five-year period and a one percent
interest adjustment for book value withdrawals, the Department has
sought to balance plans' interest in a meaningful right to book value
withdrawals with insurers' interest in maintaining balanced and stable
portfolios of investments with varying maturities. Neither the book
value option nor the market value option should require any fundamental
changes in current investment practices or strain the cash flows of
well-managed insurers.
The Department solicits comments from interested persons on: (1)
The effect on insurers and non-terminating plan policyholders of
allowing terminating plans to choose either a
[[Page 66913]]
book value payment or market value adjustment on termination of the
contract; (2) the benefit to plans of the proposed termination option
and; (3) the accuracy and burden of the proposed market value
adjustment.
5. Insurer Initiated Amendments
Paragraph (f) describes the notice requirements and payout
provisions governing insurer-initiated amendments. Under paragraph (f),
if an insurer makes an insurer-initiated amendment, the insurer must
provide written notice to the plan at least 60 days prior to the
effective date of the amendment. The notice must contain a complete
description of the amendment and must inform the policyholder of its
right to terminate or discontinue the policy and withdraw all
unallocated funds in accordance with paragraph (e)(1) or (e)(2) by
sending a written request to the name and address contained in the
notice. Proposed paragraph (f), unlike the more general termination
provisions set forth in paragraph (e), is effective upon publication of
the final regulation in the Federal Register.
An insurer-initiated amendment is defined in paragraph (h)(8) as:
(1) An amendment to a policy made by an insurer pursuant to a
unilateral right to amend the policy terms that would have a material
adverse effect on the policyholder; or (2) certain unilateral
enumerated changes that result in a reduction of existing or future
benefits under the policy, a reduction in the value of the policy or an
increase in the cost of financing the plan or plan benefits, if such
change has more than a de minimis effect.
It is the Department's view that section 401(c) is similar to a
statutory exemption to the general fiduciary responsibility provisions
of ERISA and, accordingly, an insurer will have the burden of proving
that such changes will not have more than a de minimis effect on the
policy. The regulation's insurer-initiated amendment provisions ensure
that a plan fiduciary can terminate or discontinue a contract that has
become disadvantageous as a result of unilateral action on the part of
the insurer.
The Department solicits comments on the effect of the insurer-
initiated amendment provisions in the proposed regulation.
6. Prudence
Proposed paragraph (g) sets forth the prudence standard applicable
to insurance company general accounts. Unlike the prudence standard
provided in section 404(a)(1)(B) of ERISA, prudence for purposes of
section 401(c)(3)(D) of ERISA is determined by reference to all of the
obligations supported by the general account, not just the obligations
owed to plan policyholders. In this regard, the Department notes that
nothing contained in the proposal modifies the application of the more
stringent standard of prudence set forth in section 404(a)(1)(B) of
ERISA as applicable to fiduciaries, including insurers, who manage plan
assets maintained in separate accounts, as well as to assets of the
general account which support policies issued after December 31, 1998.
7. Definitions
Proposed paragraph (h) contains definitions of certain terms used
in the proposed regulation.
8. Limitation on Liability
Proposed paragraph (i)(1) provides that no person shall be liable
under parts 1 and 4 of Title I of the Act or section 4975 of the Code
for conduct which occurred prior to the effective dates of the
regulation on the basis of a claim that the assets of an insurer (other
than plan assets held in a separate account) constitute plan assets.
Paragraph (i)(1) further provides that the above limitation on
liability does not apply in the following three circumstances: (1) An
action brought by the Secretary of Labor pursuant to paragraph (2) or
(5) of section 502(a) of the Act for a breach of fiduciary
responsibility which would also constitute a violation of Federal or
State criminal law; (2) the application of any Federal criminal law; or
(3) any civil action commenced before November 7, 1995.
Proposed paragraph (i)(2) states that the regulation does not
relieve any person from any State law regulating insurance which
imposes additional obligations upon insurers to the extent not
inconsistent with this regulation. Thus, for example, nothing in this
regulation would preclude a state from requiring an insurer to make
additional disclosures to policyholders, including plans.
Proposed paragraph (i)(3) of the regulation makes clear that
neither ERISA nor the regulations promulgated thereunder precludes a
claim against an insurer or others for a violation of the Act which is
not contingent upon the assertion that the insurer's general account
assets are plan assets, regardless of whether the violation relates to
a Transition Policy. Thus, for example, a Transition Policy may give
rise to fiduciary status on the part of the insurer based upon the
insurer's discretionary authority over the administration or management
of the plan, rather than its authority over the management of general
account assets. See section 3(21) of the Act. Nothing in ERISA or this
regulation would preclude a finding that an insurer is liable under
ERISA for breaches of its fiduciary responsibility in connection with
plan management or administration prior to the effective dates of the
regulation. Similarly, neither ERISA nor the regulation precludes a
finding that an insurer is a fiduciary by reason of its discretionary
authority or control over plan assets other than the insurer's general
account assets. If the insurer breaches its fiduciary responsibility
with respect to plan assets, it may be liable under ERISA regardless of
whether the insurer has issued a Transition Policy to a plan or
ultimately placed the plan's assets in its general account.
Paragraph (i)(4) of the proposed regulation provides that if an
insurer fails to meet the requirements of paragraphs (b) through (f) of
the regulation with respect to a specific plan policyholder the result
of such failure would be that the general account would be subject to
ERISA's fiduciary responsibility provisions with respect to the
specific plan for that period of time during which the requirement of
the regulation was not met. Once back in compliance with the
regulation, the insurer would no longer be subject to ERISA or have
potential liability for subsequent periods of time when the
requirements of the regulation are met. In addition, the regulation
makes clear that the underlying assets of the general account would not
constitute plan assets for other Transition Policies to the extent that
the insurer was in compliance with the requirements of the regulation.
9. Effective Date
Proposed paragraph (j)(1) states the general rule that the
regulation is effective 18 months after its publication in the Federal
Register.
Paragraph (j)(2), (3) and (4) of the proposed regulation provide
earlier effective dates for paragraph (b) relating to independent
fiduciary approval, paragraphs (c) and (d) relating to disclosures, and
paragraph (f) relating to insurer initiated amendments.
Paragraph (j)(2) of the proposed regulation states that if a
Transition Policy is issued before the date which is 90 days after the
date of publication of the final regulation, the disclosure provisions
in paragraphs (c) and (d) shall take effect 90 days after the
publication of the final regulation.
[[Page 66914]]
Paragraph (j)(3) of the proposed regulation provides that paragraphs
(c) and (d) are effective 90 days after the date of publication of the
regulation for a Transition Policy issued after such date. In this
regard, the Department believes that the earlier effective dates are
consistent with section 401(c)(3)(B) of the Act, as added by Pub. L.
104-188, which states that the disclosures required by the regulation
be provided after the date that the regulations are issued in final
form.
Proposed paragraph (j)(4) provides that the effective date for
paragraphs (b) and (f) of the proposed regulation is the date of
publication of the final regulation in the Federal Register. In
addition, this paragraph provides special rules for insurer-initiated
amendments which become effective during the period between the dates
of publication of the proposed and final regulations. For example,
assume that an insurer makes an insurer-initiated amendment to a
Transition Policy after publication of the proposed regulations in the
Federal Register but prior to the issuance of the final regulations. If
adopted as proposed, the insurer would have 30 days to notify the plan
of the amendment. The notice must contain a complete description of the
amendment and must inform the plan of its right to terminate the
contract and withdraw all unallocated funds. If the plan elects to
receive a lump sum payment, the insurer must calculate such amount
using the more favorable (to the plan) of the market value adjustments
determined as of: (1) The effective date of the amendment; or (2) the
date upon which the insurer received written notice from the plan
requesting a lump sum payment. Specifically, the insurer must provide
notice of the amendment to the plan within 30 days of publication of
the final regulation. The notice must contain, among other things, a
complete description of the amendment and must inform the plan of its
right to terminate or discontinue the policy and withdraw all
unallocated funds in accordance with the requirements of paragraph (e)
and this paragraph. If the policyholder elects to receive a lump sum
payment on termination or discontinuance of the policy, the insurer
must use the more favorable (to the plan) of the market value
adjustments determined on either the effective date of the amendment or
determined upon receipt of the written request from the plan.
Section 401(c)(5)(B)(i) of the Act, as added by Pub. L. 104-188,
provides an exception to the general 18-month effective date for
regulations intended to prevent the avoidance of the regulations set
forth herein. The Department is proposing an earlier effective date for
the provisions relating to the independent fiduciary approval,
disclosures and insurer-initiated amendments. The Department believes
that the earlier effective dates protect the interests and rights of a
plan and its participants and beneficiaries by minimizing the potential
for insurers to change their conduct in ways which are disadvantageous
to plan policyholders without compliance with the terms and conditions
of the regulation. The Department notes that compliance with the
specific requirements of the regulation must occur as of the date that
such requirement becomes effective. Failure to comply with any of the
requirements listed in paragraphs (b) through (f) of this regulation
after the effective date of such paragraphs will result in the general
account of the insurer holding plan assets as provided in paragraph
(i)(4).
Economic Analysis Under Executive Order 12866
Under Executive Order 12866 (58 FR 51735, Oct. 4, 1993), the
Department must determine whether the regulatory action is
``significant'' and therefore subject to review by the Office of
Management and Budget (OMB) under the requirements of the Executive
Order. Under section 3(f), the order defines a ``significant regulatory
action'' as an action that is likely to result in, among other things,
a rule raising novel policy issues arising out of the President's
priorities. Pursuant to the terms of the Executive Order, the
Department has determined that this regulatory action is a
``significant regulatory action'' as that term is used in Executive
Order 12866 because the action would raise novel policy issues arising
out of the President's priorities. Thus, the Department believes this
notice is ``significant,'' and subject to OMB review on that basis.
The Office of Management and Budget has determined that this
regulatory action is economically significant because it may adversely
effect in a material way a sector of the economy. The Department
therefore solicits additional information from the interested public
regarding the economic impact of the proposed regulation. Specifically,
the Department requests current data on the number and characteristics
of potentially affected insurance contracts that would provide the
basis for a more extensive analysis of the costs and benefits of the
proposed regulation.
These regulations mitigate the constraints imposed by ERISA on the
operation of insurance company general accounts. The Department
believes that insurers are likely in nearly all circumstances to avail
themselves of the relief provided under the proposed regulation. The
consequences for an insurer, of not complying with the safe harbor
afforded by the regulation, would subject the insurer's general account
to potential liability under part 4 of Title I of ERISA. Because the
statute simply directs the Department to issue a regulation and
specifies much of the regulation's content, its costs and benefits may
be estimated simply by analyzing the regulation. The Department is not
aware of any published analysis of the nature or level of the costs the
statute will not impose.
The Department has endeavored to control the compliance costs
associated with the regulation by providing model language, by
requiring disclosures at the outset of the contract or no more than
annually, and by allowing disclosure materials to be based on materials
prepared for other reasons. The Department's analysis of the impact of
the regulation has concluded that it will provide greater protections
for 130,000 pension plans holding contracts with 110 insurers. The net
cost of these protections is estimated to be no more than $2 to $5
million per year. This estimate of the potential impact of the proposed
regulation is based on the Department's estimates of assets held in
life insurers' general accounts and the proportion of these that might
be deemed to be holding ERISA plan assets. The total of all assets held
by life insurers in their general accounts amounts to approximately
$1.7 trillion. Based on data reported on Schedule A available from Form
5500 series reports, the Department estimates that the assets of
contracts potentially directly affected by the regulation have a
current value of approximately $40 billion or slightly less than 3
percent of general account assets. This estimate of $40 billion
represents the amount reported by plans to be held in contracts
categorized as unallocated general account contracts whose performance
is linked with that of the general accounts in the annual financial
reports filed by plans. As such it represents an upper bound of the
value of the contracts potentially affected by the regulation because
some portion of these contracts may in fact already meet the conditions
specified in the regulation. The Department solicits additional data
which would permit a further delineation of the affected assets.
It is estimated that the costs of this regulation will primarily
arise from the cost of compliance with its disclosure requirements. The
benefits to plans,
[[Page 66915]]
participants and beneficiaries arise from the improved understanding of
their investment that comes from the disclosure, and from the limits on
the calculation of the market value adjustment by the insurer at the
time of termination of the contract.
The insurance contracts affected by this regulation have a wide
range of characteristics that cannot in a comprehensive way be
precisely defined. They may differ widely, in particular with respect
to the conditions associated with their termination provisions.
However, the regulation's disclosure and termination provisions
establish minimum standards, which may be more favorable to plans than
their terms absent the regulation. As a result, some plans that have
been unable to terminate, or might not have terminated, their
contractual arrangements may now terminate those arrangements. The
Department does not believe, however, that the regulation will have a
significant adverse financial impact on other general account
policyholders or insurers. As the American Council of Life Insurance
has noted in various submissions, the relevant contracts typically
already permit the termination and withdrawal of plan assets in a lump
sum (subject to a market value adjustment) or in installments over a
period of years at book value with interest. Although the regulation
protects plans by permitting them to withdraw plan assets in a lump sum
without penalty, it also protects the legitimate interests of insurers
by permitting them to recover incurred costs and to impose a market
value adjustment designed to ``accurately reflect the effect on the
value of the accumulation fund of its liquidation in the prevailing
market for fixed income obligations.'' Similarly, the regulation
mitigates any adverse economic impact by permitting insurers to spread
book value withdrawals over a five-year period at a reduced rate of
interest (assuming the relevant contract does not give the plan more
favorable termination and withdrawal rights). The Department believes
that these provisions adequately protect the insurers from the risks of
``adverse selection'' or disintermediation, while providing significant
protection to plan policyholders. In many respects, the regulation
simply parallels the pre-existing rule under ERISA that a contract
between a plan and party in interest is impermissible unless it permits
termination without penalty so as to ``prevent the plan from becoming
locked into an arrangement that has become disadvantageous.'' 29 CFR
2550.408b-2(c).
A portion of the estimated costs of the regulation is attributed to
the termination of some contracts which, absent the regulation, would
have remained in force. Some of the costs that the insurers may incur
are offset, however, by commensurate benefits to plans. The only net
costs of the regulation therefore, are the cost of supplying the
disclosure information and transaction costs for plans terminating
their insurance contracts. In the view of the Department, these costs
must be weighed against the benefits that accrue to plans and the
economy in general from the enhanced transparency of general account
products, and the resulting increased ability plans will have to
rationally manage their portfolios and allocate assets more
efficiently. The regulation is designed to ensure that a plan fiduciary
will have access to all the information necessary to assess the
potential and actual performance of a general account contract both
before and after entering into the initial agreement with the insurer.
The regulation's termination and withdrawal provisions additionally
ensure that the plan fiduciary can act on the information disclosed by
withdrawing the plan's assets in favor of other investment vehicles or
expenditures if it is prudent or economically advantageous to do so.
The net result is to safeguard plans' ability to allocate their
resources in the most economically rational manner possible.
The analysis of the impact of the regulation does not attribute any
cost to the possible effect of the regulation on the management or
composition of insurers' general account portfolios. This is because
the total value of the contracts potentially affected represent less
than 3 percent of general account assets. According to data published
by the American Council of Life Insurance, general account reserves are
primarily invested in fixed income securities of relatively short
maturities. The maximum liquidity requirement imposed by the regulation
in the highly unlikely event that all of the affected plans chose to
terminate the contracts would be less than 6-tenths percent of the
general accounts (this reflects the distribution of 3 percent of
general assets over 5 years). This should be readily available from the
cash flow derived from the current distribution of investments. The
Department therefore has not assigned any cost of the regulation to
other general account policyholders.
The insurance industry has not provided the Department with any
information regarding the magnitude of their costs. Accordingly, the
Department solicits additional information from the interested public
regarding the economic analysis in the proposed regulation.
Specifically, the Department requests comments and supporting data on
the costs and benefits of the proposed regulation, as well as
information on whether more frequent contract terminations which may
result from enhanced opportunities provided by the proposed regulation
will result in an increase in brokerage, appraisal and/or other
transactions costs.
Regulatory Flexibility Act
The Regulatory Flexibility Act of 1980 requires each Federal agency
to perform an Initial Regulatory Flexibility Analysis for all rules
that are likely to have a significant economic impact on a substantial
number of small entities. Small entities include small businesses,
organizations, and governmental jurisdictions. The Pension and Welfare
Benefits Administration has determined that this rule will not have a
significant economic impact on a substantial number of small entities.
A summary for the basis of that conclusion follows:
(1) PWBA is promulgating this regulation because it is required to
do so under section 1460 of the Small Business Job Protection Act of
1996 (Pub. L. 104-188).
(2) The objective of the proposed regulation is to provide guidance
on the application of ERISA to policies held in insurance company
general accounts. The legal basis for the proposed regulation is found
in new ERISA section 401(c); an extensive list of authorities may be
found in the Statutory Authority section, below.
(3) The direct cost of compliance will be born by insurance
companies; the Department estimates that no ``small'' insurance
companies (as defined by the Small Business Administration at 61 FR
3280, Jan 31, 1996) offer the type of policies regulated here. No small
governmental jurisdictions will be affected. It is estimated that
121,000 small employee benefit plans (those with fewer than 100
participants) purchase the regulated policies, and will therefore
receive the benefit of the enhanced disclosure provided by the
regulation. Some of the costs of disclosure may be passed on to the
plans by the insurers.
(4) No federal reporting is required under the proposed rule. It is
anticipated that the majority of the disclosure requirements may be
handled by clerical staff; however, there will be
[[Page 66916]]
a need for professional staff involvement.
(5) No federal rules have been identified that duplicate, overlap
or conflict with the proposed rule. To the extent possible, the overlap
in disclosures between this rule and state and SEC reporting
requirements have been designed to allow the same materials to meet
both requirements while providing the necessary protections for
employee benefit plans.
(6) No significant alternatives which would minimize the impact on
small entities have been identified. It would be inappropriate to
create an alternative with lower compliance criteria, or an exemption
under the proposed regulation, for small plans because those are the
entities that have the greatest need for the disclosures and other
protections offered by the regulation.
Paperwork Reduction Act
The proposed regulation contains information collections which are
subject to review by the Office of Management and Budget (OMB) under
the Paperwork Reduction Act of 1995. The title, summary, description of
need, respondents description, and estimated reporting and
recordkeeping burden are shown below.
Title: Disclosure Regarding Plan Assets in Insurance Company
General Accounts.
Summary/Description of Need: Section 1460 of the Small Business Job
Protection Act of 1996 (Pub. L. 104-188) amended ERISA by adding new
Section 401(c), which requires that certain steps be taken by insurance
companies which offer and maintain policies for private sector employee
benefit plans where the assets are held in the insurer's general
account. Pursuant to the authority given to the Secretary under the
statute, the regulation requires certain disclosures be provided at the
outset of the contract and annually, and other disclosures be provided
upon request.
Respondents Description: Individuals or households; Business or
other for-profit institutions; Not-for-profit institutions.
Estimated Reporting and Recordkeeping Burden: Based upon Form 5500
filing data, an estimated 134,000 plans, primarily pension plans, have
invested in 138,000 policies offered by approximately 110 insurance
companies. Because insurers must already assemble much of the
information to be disclosed for purposes of state disclosure
requirements and their own administration of the contracts, the
Department does not believe the additional disclosure obligations
imposed by the regulation will be unduly burdensome. The additional
costs can be divided into start-up expenses incurred immediately after
the regulation takes effect, and a yearly expense thereafter. Initially
insurers will be required to modify disclosure forms and computer
programs to comply with the new obligations imposed by the regulation.
In total, the Department estimates that this initial expense will cost
no more than $2 to $5 million. Thereafter, the Department estimates
that insurers will generally incur disclosure and reproduction expenses
of between $100 and $200 for each contract to which the regulation
applies.
The Department of Labor has submitted a copy of the proposed
information collection to the Office of Management and Budget in
accordance with 44 U.S.C. Sec. 3507(d) of the Paperwork Reduction Act
of 1995 for its review of its information collections. Interested
persons are invited to submit comments regarding this proposed new
collection of information.
The Department of Labor is particularly interested in comments
which:
Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhance the quality, utility and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
Comments should be sent to the Office of Information and Regulatory
Affairs (OIRA), Office of Management and Budget (OMB), Room 10235, New
Executive Office Building, Washington, D.C. 20503; Attention: Desk
Officer for the Pension and Welfare Benefits Administration. OMB
requests that comments be received within 30 days of publication of the
Notice of Proposed Rulemaking.
Statutory Authority
The proposed regulation set forth herein is issued pursuant to the
authority contained in sections 401(c) and 505 of ERISA (Pub. L. 93-
406, Pub. L. 104-188, 88 Stat. 894; 29 U.S.C. 1101(c), 29 U.S.C. 1135)
and section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713,
October 17, 1978), effective December 31, 1978 (44 FR 1065, January 3,
1979), 3 CFR 1978 Comp. 332, and under Secretary of Labor's Order No.
1-87, 52 FR 13139 (April 21, 1987).
List of Subjects in 29 CFR Part 2550
Employee benefit plans, Employee Retirement Income Security Act,
Employee stock ownership plans, Exemptions, Fiduciaries, Insurance
Companies, Investments, Investment foreign, Party in interest,
Pensions, Pension and Welfare Benefit Programs Office, Prohibited
transactions, Real estate, Securities, Surety bonds, Trusts and
trustees.
For the reasons discussed in the preamble, it is proposed to amend
29 CFR part 2550 as follows:
PART 2550--[AMENDED]
1. The authority for Part 2550 is revised to read as follows:
Authority: 29 U.S.C. 1135. Section 2550.401b-1 also issued under
sec. 102, Reorganization Plan No. 4 of 1978, 43 FR 47713, 3 CFR,
1978 Comp., p. 332. Section 2550.401c-1 also issued under 29 U.S.C.
1101. Section 2550.404c-1 also issued under 29 U.S.C. 1104. Section
2550.407c-3 also issued under 29 U.S.C. 1107. Section 2550.408b-1
also issued under sec. 102, Reorganization Plan No. 4 of 1978, 43 FR
47713, 3 CFR, 1978 Comp., p. 332, and 29 U.S.C. 1108(b)(1). Section
2550.412-1 also issued under 29 U.S.C. 1112. Secretary of Labor's
Order No. 1-87 (52 FR 13139).
2. New section 2550.401c-1 is added to read as follows:
Sec. 2550.401c-1 Definition of ``plan assets''--insurance company
general accounts.
(a) In general. (1) This section describes, in the case where an
insurer issues one or more policies to or for the benefit of an
employee benefit plan (and such policies are supported by assets of an
insurance company's general account), which assets held by the insurer
(other than plan assets held in its separate accounts) constitute plan
assets for purposes of Subtitle A, and Parts 1 and 4 of Subtitle B, of
Title I of the Employee Retirement Income Security Act of 1974 (ERISA
or the Act) and section 4975 of the Internal Revenue Code (the Code),
and provides guidance with respect to the application of Title I of the
Act and section 4975 of the Code to the general account assets of
insurers.
(2) Generally, when a plan acquires a policy issued by an insurer
on or before
[[Page 66917]]
December 31, 1998 (Transition Policy), which is supported by assets of
the insurer's general account, the plan's assets include the policy,
but do not include any of the underlying assets of the insurer's
general account if the insurer satisfies the requirements of paragraphs
(b) through (f) of this section.
(b) Approval by fiduciary independent of the issuer.--(1) In
general. An independent plan fiduciary who has the authority to manage
and control the assets of the plan must expressly authorize the
acquisition or purchase of the Transition Policy. For purposes of this
subparagraph, a fiduciary is not independent if the fiduciary is an
affiliate of the insurer issuing the policy.
(2) Notwithstanding paragraph (b)(1) of this section, the
authorization by an independent plan fiduciary is not required if:
(i) The insurer is the employer maintaining the plan, or a party in
interest which is wholly owned by the employer maintaining the plan;
and
(ii) The requirements of section 408(b)(5) of the Act are met.
(c) Duty of Disclosure.--(1) In general. An insurer shall furnish
the following information to a plan fiduciary acting on behalf of a
plan to which a Transition Policy has been issued. Paragraph (c)(2) of
this section describes the style and format of such disclosure.
Paragraph (c)(3) of this section describes the content of the initial
disclosure. Paragraph (c)(4) of this section describes the information
that must be disclosed by the insurer at least once per year for as
long as the
Transition Policy remains outstanding.
(2) Style and format. The disclosure required by this paragraph
should be clear and concise and written in a manner calculated to be
understood by a plan fiduciary, without relinquishing any of the
substantive detail required by paragraphs (c)(3) and (c)(4) of this
section. The information does not have to be organized in any
particular order but should be presented in a manner which makes it
easy to understand the operation of the policy. To the extent
paragraphs (c)(3) and (c)(4) of this section require the disclosure of
the insurer's methods or methodologies for determining various values
or amounts relevant to the plan's policy, the disclosure must be made
in sufficient detail and with such clarity that the plan fiduciary,
with relevant data from the insurer and appropriate professional
assistance, can determine the values or amounts applicable to the
plan's policy. The insurer must disclose any data necessary for
application of the methods or methodologies without unreasonable delay
upon the request of the plan fiduciary.
(3) Initial Disclosure. Prior to obtaining a binding commitment
from a plan to acquire a Transition Policy, the insurer must provide to
the plan, either as part of the policy, or as a separate written
document which accompanies the policy, the disclosure information set
forth in paragraph (c)(3)(i) through (iv) of this section. In the case
of a Transition Policy that has been issued before the date which is 90
days after the date of publication of the final regulation, the insurer
must provide the disclosure information no later than 90 days after
publication. The disclosure must include all of the following
information which is applicable to the Transition Policy:
(i) A description of the method by which any income and expenses of
the insurer's general account are allocated to the policy during the
term of the policy and upon its termination, including:
(A) A statement of the method used by the insurer to determine the
fees, charges, expenses or other amounts that are or may be assessed
against the policyholder or deducted by the insurer from any
accumulation fund under the policy, including the extent and frequency
with which such fees, charges, expenses or other amounts may be
modified by the insurance company;
(B) A statement of the method by which the insurer determines the
return to be credited to any accumulation fund under the policy,
including a statement of the method used to allocate income and
expenses to lines of business, business segments, and policies within
such lines of business and business segments, and a description of how
any withdrawals, transfers, or payments will affect the amount of the
return credited;
(C) A description of the rights which the policyholder or plan
participant has to withdraw or transfer all or a portion of any fund
under the policy, or to apply the amount of a withdrawal to the
purchase of or payment of benefits, and the terms on which such
withdrawals or other use of funds may be made, including a description
of any expense charges, fees, experience rating charges or credits,
market value adjustments, or any other charges or adjustments, both
positive and negative;
(D) A statement of the method used to calculate the charges, fees,
credits or market value adjustments described in paragraph (i)(C) of
this section, and, upon the request of a plan fiduciary, the
information necessary to independently calculate the exact dollar
amounts of the charges, fees or adjustments. The initial disclosure
provided to the plan must set forth and describe each of the provisions
and elements of the formula for making the market value adjustment in
sufficient detail and with such clarity that the plan fiduciary, with
relevant data from the insurer and with professional assistance, if
necessary, can replicate any adjustment proposed by the insurer. If the
formula is based on interest rate guarantees applicable to new
contracts of the same class or classes, and the duration of the assets
underlying the accumulation fund, the contract must describe the
process by which those components are ascertained or obtained. If the
formula is based on an interest rate implicit in an index of publicly
traded obligations, the identity of the index, the manner in which it
is used, and identification of the source or publication where any data
used in the formula can be found, must be disclosed;
(ii) A statement describing the expense, income and benefit
guarantees under the policy, including a description of the length of
such guarantees, and of the insurer's right, if any, to modify or
eliminate such guarantees; and
(iii) A description of the rights of the parties to make or
discontinue contributions under the policy, and of any restrictions
(such as timing, minimum or maximum amounts, and penalties and grace
periods for late payments) on the making of contributions under the
policy, and the consequences of the discontinuance of contributions
under the policy.
(iv) A statement of how any policyholder or participant-initiated
withdrawals are to be made: first-in, first-out (FIFO) basis, last-in,
first-out (LIFO) basis, pro rata or another basis.
(4) Annual disclosure. At least annually and not later than 90 days
following the period to which it relates, an insurer shall provide the
following information to each plan to which a Transition Policy has
been issued:
(i) The balance of any accumulation fund on the first day and last
day of the period covered by the annual report;
(ii) Any deposits made to the accumulation fund during such annual
period;
(iii) An itemized statement of all income attributed to the policy
or added to the accumulation fund during the period, and a description
of the method used by the insurer to determine the precise amount of
income;
(iv) The actual rate of return credited to the accumulation fund
under the policy during such period, stating whether the rate of return
was calculated before or after deduction of
[[Page 66918]]
expenses charged to the accumulation fund;
(v) Any other additions to the accumulation fund during such
period;
(vi) An itemized statement of all fees, charges, expenses or other
amounts assessed against the policy or deducted from the accumulation
fund during the reporting year, and a description of the method used by
the insurer to determine the precise amount of the fees, charges and
other expenses;
(vii) An itemized statement of all benefits paid, including annuity
purchases, to participants and beneficiaries from the accumulation
fund;
(viii) The dates on which the additions or subtractions were
credited to, or deleted from, the accumulation fund during such period;
(ix) A description, if applicable, of all transactions with
affiliates which exceed 1 percent of group annuity reserves of the
general account for the prior reporting year;
(x) A statement describing any expense, income and benefit
guarantees under the policy, including a description of the length of
such guarantees, and of the insurer's right, if any, to modify or
eliminate such guarantees;
(xi) The amount that would be payable in a lump sum at the end of
such period pursuant to the request of a policyholder for payment or
transfer of amounts in the accumulation fund under the policy after the
insurer deducts any applicable charges and makes any appropriate market
value adjustments, upward or downward, under the terms of the policy;
and
(xii) An explanation that the insurer promptly will make available
upon request of a plan, copies of the following publicly-available
financial data or other publicly available reports relating to the
financial condition of the insurer:
(A) National Association of Insurance Commissioners (NAIC)
Statutory Annual Statement, with Exhibits, General Interrogatories, and
Schedule D, Part 1A, Secs 1 and 2 and Schedule S-Part 3E;
(B) Rating agency reports on the financial strength and claims-
paying ability of the insurer;
(C) Risk adjusted capital ratio, with a brief description of its
derivation and significance, referring to the risk characteristics of
both the assets and the liabilities of the insurer;
(D) Actuarial opinion (with supporting documents) of the insurer's
Appointed Actuary certifying the adequacy of the insurer's reserves as
required by New York State Insurance Department Regulation 126 and
comparable regulations of other states; and
(E) The insurer's most recent SEC Form 10K and Form 10Q (stock
companies only).
(d) Alternative separate account arrangements.--(1) In general. An
insurer must provide the plan fiduciary with the following additional
information at the same time as the disclosure required under paragraph
(c) of this section:
(i) A statement explaining the extent to which alternative contract
arrangements supported by assets of separate accounts of insurers are
available to plans;
(ii) A statement as to whether there is a right under the policy to
transfer funds to a separate account and the terms governing any such
right; and
(iii) A statement explaining the extent to which general account
contracts and separate account contracts of the insurer may pose
differing risks to the plan.
(2) An insurer will be deemed to comply with the requirements of
paragraph (d)(1)(iii) of this section if the disclosure provided to the
plan includes the following statement:
a. Contractual arrangements supported by assets of separate
accounts may pose differing risks to plans from contractual
arrangements supported by assets of general accounts. Under a
general account contract, the plan's contributions or premiums are
placed in the insurer's general account and commingled with the
insurer's corporate funds and assets (excluding separate accounts
and special deposit funds). The insurance company combines in its
general account premiums received from all its lines of business.
These premiums are pooled and invested by the insurer. General
account assets in the aggregate support the insurer's obligations
under all of its insurance contracts, including (but not limited to)
its individual and group life, health, disability, and annuity
contracts. Experience rated general account policies may share in
the experience of the general account through interest credits,
dividends, or rate adjustments, but assets in the general account
are not segregated for the exclusive benefit of any particular
policy or obligation. General account assets are also available to
the insurer for the conduct of its routine business activities, such
as the payment of salaries, rent, other ordinary business expenses
and dividends.
b. An insurance company separate account is a segregated fund
which is not commingled with the insurer's general assets. Depending
on the particular terms of the separate account contract, income,
expenses, gains and losses associated with the assets allocated to a
separate account may be credited to or charged against the separate
account without regard to other income, expenses, gains, or losses
of the insurance company, and the investment results passed through
directly to the policyholders. While most, if not all, general
account investments are maintained at book value, separate account
investments are normally maintained at market value, which can
fluctuate according to market conditions. In large measure, the
risks associated with a separate account contract depend on the
particular assets in the separate account.
c. The plan's legal rights vary under general and separate
account contracts. In general, an insurer is subject to ERISA's
fiduciary responsibility provisions with respect to the assets of a
separate account (other than a separate account registered under the
Investment Company Act of 1940) to the extent that the investment
performance of such assets is passed directly through to the plan
policyholders. ERISA requires insurers, in administering separate
account assets, to act solely in the interest of the plan's
participants and beneficiaries; precludes self-dealing and conflicts
of interest; and requires insurers to adhere to a prudent standard
of care. In contrast, ERISA generally imposes less stringent
standards in the administration of general account contracts which
were issued on or before December 31, 1998.
d. On the other hand, state insurance regulation is typically
more restrictive with respect to general accounts than separate
accounts. In addition, insurance company general account policies
often include various guarantees under which the insurer assumes
risks relating to the funding and distribution of benefits. Insurers
do not usually provide any guarantees with respect to the investment
returns on assets held in separate accounts. Of course, the extent
of any guarantees from any general account or separate account
contract will depend upon the specific policy terms.
e. Finally, separate accounts and general accounts pose
differing risks in the event of the insurer's insolvency. In the
event of insolvency, funds in the general account are available to
meet the claims of the insurer's general creditors, after payment of
amounts due under certain priority claims, including amounts owed to
its policyholders. Funds held in a separate account as reserves for
its policy obligations, however, may be protected from the claims of
creditors other than the policyholders participating in the separate
account. Whether separate account funds will be granted this
protection will depend upon the terms of the applicable policies and
the provisions of any applicable laws in effect at the time of
insolvency.
(e) Termination procedures. Within 90 days of written notice by a
policyholder to an insurer, the insurer must permit the policyholder to
exercise the right to terminate or discontinue the policy and to
receive without penalty either:
(1) a lump sum payment representing all unallocated amounts in the
accumulation fund. For purposes of this paragraph (e), the term penalty
does not include a market value adjustment (as defined in paragraph
(h)(7) of this section) or the recovery of costs actually incurred
which would have been
[[Page 66919]]
recovered by the insurer but for the termination or discontinuance of
the policy, including any unliquidated acquisition expenses, to the
extent not previously recovered by the insurer; or
(2) a book value payment of all unallocated amounts in the
accumulation fund under the policy in approximately equal annual
installments, over a period of no longer than five years, together with
interest computed at an annual rate which is no less than the annual
rate which was credited to the accumulation fund under the policy as of
the date of the contract termination or discontinuance, minus 1
percentage point.
(f) Insurer-initiated amendments. In the event the insurer makes an
insurer-initiated amendment (as defined in paragraph (h)(8) of this
section), the insurer must provide written notice to the plan at least
sixty days prior to the effective date of the insurer-initiated
amendment. The notice must contain a complete description of the
amendment and must inform the plan of its right to terminate or
discontinue the policy and withdraw all unallocated funds without
penalty by sending a written request within such sixty day period to
the name and address contained in the notice. The plan must be offered
the right to receive a lump sum or installment payment described in
paragraph (e)(1) or (e)(2) of this section. An insurer-initiated
amendment shall not apply to a contract if the plan fiduciary exercises
its right to terminate or discontinue the contract within such sixty
day period and to receive a lump sum or installment payment.
(g) Prudence. An insurer shall manage those assets of the insurer
which are assets of such insurer's general account (irrespective of
whether any such assets are plan assets) with the care, skill, prudence
and diligence under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such matters would use
in the conduct of an enterprise of a like character and with like aims,
taking into account all obligations supported by such enterprise. This
prudence standard applies to the conduct of all insurers with respect
to policies issued to plans on or before December 31, 1998, and differs
from the prudence standard set forth in section 404(a)(1)(B) of ERISA.
Under the prudence standard provided in this paragraph, prudence must
be determined by reference to all of the obligations supported by the
general account, not just the obligations owed to plan policyholders.
The more stringent standard of prudence set forth in section
404(a)(1)(B) of ERISA continues to apply to any obligations which
insurers may have as fiduciaries which do not arise from the management
of general account assets, as well as to insurers' management of plan
assets maintained in separate accounts. The terms of the regulation do
not modify or reduce the fiduciary obligations applicable to insurers
in connection with policies issued after December 31, 1998, which are
supported by general account assets, including the standard of prudence
under section 404(a)(1)(B) of the Act.
(h) Definitions. For purposes of this section:
(1) an affiliate of an insurer means:
(i) Any person, directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the insurer,
(ii) Any officer, director, partner or employee of such insurer or
of a person described in paragraph (i) of this definition including in
the case of an insurer, an insurance agent or broker thereof, whether
or not such person is a common law employee, and
(iii) Any corporation, partnership, or unincorporated enterprise of
which a person described in paragraph (ii) of this definition is an
officer, director, partner or employee.
(2) The term control means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(3) The term guaranteed benefit policy means a policy described in
section 401(b)(2)(B) of the Act and any regulations promulgated
thereunder.
(4) The term insurer means an insurer as described in section
401(b)(2)(A) of the Act.
(5) The term accumulation fund means the aggregate net
consideration (i.e., gross considerations less all deductions from such
considerations) credited to the Transition Policy plus all additional
amounts, including interest and dividends, credited to such Transition
Policy less partial withdrawals, benefit payments and less all charges
and fees imposed against this accumulated amount under the Transition
Policy other than surrender charges and market value adjustments.
(6) The term Transition Policy means:
(i) a policy or contract of insurance (other than a guaranteed
benefit policy) that is issued by an insurer to, or on behalf of, an
employee benefit plan on or before December 31, 1998, and which is
supported by the assets of the insurer's general account.
(ii) A policy will not fail to be a Transition Policy merely
because the policy is amended or modified to comply with the
requirements of section 401(c) of the Act and this section.
(7) For purposes of this regulation, the term market value
adjustment means an adjustment to the book value of the accumulation
fund to accurately reflect the effect on the value of the accumulation
fund of its liquidation in the prevailing market for fixed income
obligations, taking into account the future cash flows that were
anticipated under the policy. An adjustment is a market value
adjustment within the meaning of this definition only if the insurer
has determined the amount of the adjustment pursuant to a method which
was previously disclosed to the policyholder in accordance with
paragraph (c)(3)(i)(D) of this section, and the method permits both
upward and downward adjustments to the book value of the accumulation
fund.
(8) The term insurer-initiated amendment is defined in paragraphs
(h)(8) (i) and (ii) of this section:
(i) An amendment to a policy made by an insurer pursuant to a
unilateral right to amend the policy terms that would have a material
adverse effect on the policyholder; or
(ii) Any of the following unilateral changes in the insurer's
conduct or practices with respect to the policyholder or the
accumulation fund under the policy that result in a reduction of
existing or future benefits under the policy, a reduction in the value
of the policy or an increase in the cost of financing the plan or plan
benefits, if such changes have more than a de minimis effect on the
policy:
(A) A change in the methodology for assessing fees, expenses, or
other charges against the accumulation fund or the policyholder;
(B) A change in the methodology used for allocating income between
lines of business, or product classes within a line of business;
(C) A change in the methodology used for determining the rate of
return to be credited to the accumulation fund under the policy;
(D) A change in the methodology used for determining the amount of
any fees, charges, or market value adjustments applicable to the
accumulation fund under the policy in connection with the termination
of the contract or withdrawal from the accumulation fund;
(E) A change in the dividend class to which the policy or contract
is assigned;
(F) A change in the policyholder's rights in connection with the
termination of the contract, withdrawal of funds or the purchase of
annuities for plan participants; and
(G) A change in the annuity purchase rates.
[[Page 66920]]
(iii) For purposes of this definition, any amendment or change
which is made with the affirmative consent of the policyholder is not
an insurer-initiated amendment.
(i) Limitation on liability. (1) No person shall be subject to
liability under Parts 1 and 4 of Title I of the Act or section 4975 of
the Code for conduct which occurred prior to the effective dates of the
regulation on the basis of a claim that the assets of an insurer (other
than plan assets held in a separate account) constitute plan assets.
Notwithstanding the foregoing, this section shall not:
(i) Apply to an action brought by the Secretary of Labor pursuant
to paragraphs (2) or (5) of section 502(a) of ERISA for a breach of
fiduciary responsibility which would also constitute a violation of
Federal or State criminal law;
(ii) Preclude the application of any Federal criminal law; or
(iii) Apply to any civil action commenced before November 7, 1995.
(2) Nothing in this section relieves any person from any State law
regulating insurance which imposes additional obligations or duties
upon insurers to the extent not inconsistent with the provisions of
this section. Therefore, nothing in this section should be construed to
preclude a State from requiring insurers to make additional disclosures
to policyholders, including plans. Nor does this section prohibit a
State from imposing additional substantive requirements with respect to
the management of general accounts or from otherwise regulating the
relationship between the policyholder and the insurer to the extent not
inconsistent with the provisions of this section;
(3) Nothing in this section precludes any claim against an insurer
or other person for violations of the Act which do not require a
finding that the underlying assets of a general account constitute plan
assets, regardless of whether the violation relates to a Transition
Policy; and
(4) If the requirements in paragraphs (b) through (f) of this
section of the regulation are not met with respect to a plan that has
purchased or acquired a Transition Policy, the plan's assets include an
undivided interest in the underlying assets of the insurer's general
account for that period of time for which the requirements are not met.
However, an insurer's failure to comply with the requirements of this
section with respect to any particular Transition Policy will not
result in the underlying assets of the general account constituting
plan assets with respect to other Transition Policies if the insurer is
otherwise in compliance with the requirements contained in the section.
(j) Effective date. (1) In general. Except as provided below, this
section is effective from the date which is 18 months after its
publication in the Federal Register.
(2) With respect to a Transition Policy issued before the date
which is 90 days after the date of publication of the final regulation,
paragraphs (c) and (d) of this section shall apply to the policy 90
days after the date of such publication.
(3) With respect to a Transition Policy issued 90 days after the
date of publication of the final regulation, paragraphs (c) and (d) of
this section shall apply to the policy as of the date of such
publication.
(4) Paragraph (b) of this section, relating to independent
fiduciary approval, and paragraph (f) of this section, relating to
insurer-initiated amendments, are effective on the date of publication
of the final regulation in the Federal Register. In the event an
insurer makes an insurer-initiated amendment to a Transition Policy
during the period between the dates of publication of the proposed and
final regulations, the insurer must provide written notice to the plan
within 30 days of publication of the final regulation. The document
must contain a complete description of the amendment; inform the plan
of its right to terminate or discontinue the policy and withdraw all
unallocated funds without penalty in accordance with the requirements
of paragraph (e) of this section and this paragraph; and provide that
the plan may exercise its right by sending a written request to the
name and address contained in the notice within sixty days of its
receipt of the notice from the insurer. In the event that the plan
exercises its right to terminate or discontinue the policy, the insurer
must disregard the effect of any insurer-initiated amendment which
would have the effect of decreasing the amount distributed to the plan.
In the case of a plan electing a lump sum payment, the insurer must use
the more favorable (to the plan) of the market value adjustments
determined on either the effective date of the amendment or determined
upon receipt of the written request from the plan in calculating the
lump sum representing the unallocated funds in the accumulation fund.
Signed at Washington, DC this 15th day of December, 1997.
Olena Berg,
Assistant Secretary, Pension and Welfare Benefits Administration, U.S.
Department of Labor.
[FR Doc. 97-33088 Filed 12-19-97; 8:45 am]
BILLING CODE 4510-29-P
