Plan Trustee Who Is Also Investment Advisor to Plan In Violation of ERISA

April 28, 2005 ( - A plan trustee who causes a defined contribution plan to invest in a particular fund in which the trustee is an investment advisor to the fund would be violating the Employee Retirement Income Security Act (ERISA) sections on prohibited transactions.

This is the Advisory Opinion of the Department of Labor’s Employee Benefit Security Administration, 2005-04A and released on Tuesday.

“If that trustee uses any authority, control, or responsibility that makes him a fiduciary to cause the plan to invest in the fund, the trustee will engage in a violation,” the advisory opinion said.

The facts in the Advisory Opinion are as follows: A foundation sponsors an employee DC retirement plan and the fund is a registered, open-ended investment company that is advised and distributed by an investment adviser, according to the opinion. A three-person board of trustees governs the foundation   and none of them are currently employees of the foundation or participants in the DC retirement plan.

Decisions regarding investments for the plan are made by the foundation, and the foundation also is the plan administrator and the fiduciary of the plan. However, one of the trustees   happens to be   the president and chief executive officer of the investment advisor, holding a 30% ownership interest in the advisor. He also does day-to-day management of the fund’s assets.

The Advisory Opinion states that in this situation there arises a conflict of interest for the trustee. “It is the opinion of the department that based on these factors, taken together, this trustee has an interest in the fund that may affect his best judgment as a fiduciary of the plan regarding the decision whether to invest plan assets in the fund,” the opinion said. Therefore, the opinion states that the trustee would be engaging in a prohibited transaction.

ERISA’s general standards of fiduciary conduct would apply to the proposed investment, according to the opinion. Under Section 404(a)(1) of ERISA, plan fiduciaries must act prudently and in the interest of the plan participants and beneficiaries in deciding whether to make an investment of plan assets in the fund.

The opinion is at .