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Michael A. Crabtree, Esq.
Central Pension Fund of the International Union of
Operating Engineers and Participating Employers
4115 Chesapeake Street, NW
Washington, DC 20016-4665 |
2002-08A
ERISA Sec. 404(a) & 408(b)(2) |
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Dear Mr. Crabtree: |
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This is in response to your request for an
advisory opinion on behalf of the Central Pension Fund of the
International Union of Operating Engineers and Participating
Employers (the “Fund”) concerning the application of the
provisions of the Employee Retirement Income Security Act of 1974,
as amended (ERISA). Specifically, you have requested the views of
the Department as to whether inclusion of certain indemnification
and hold-harmless provisions in a plan’s service provider contract
would violate the fiduciary provisions of ERISA. |
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You represent that an actuarial firm, in
connection with discussions relating to the renewal of its contract
to provide actuarial services to the Fund, advised that it was
requiring all new engagement letters to contain, among other things,
“limitation of liability” and “indemnification” provisions.
These provisions, in effect, would require the Fund to agree not to
recover from the actuarial firm an amount in excess of the greater
of $250,000 or one year’s fee for any damage caused to the Fund
“regardless of the cause of action,” and to indemnify and hold
the actuarial firm harmless for any amount exceeding the same limits
“from any third party claim or liability” arising from, or in
connection with, the firm’s services to the Fund. The Fund’s
insurer has informed the Fund that its fiduciary liability policy
would not cover the Fund’s losses if the Fund suffered losses in
excess of $250,000 as a result of the actuarial firm’s actions
that were not recovered because of the proposed limitation of
liability and indemnification provisions. The insurer explained that
the policy is not designed to cover professional liability exposures
normally associated with Actuarial Errors and Omissions coverage. |
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Although the Fund has decided not to retain the
actuarial firm, opting instead for a firm that required no specific
limitation of liability or indemnification provision, limitation of
liability and indemnification provisions may be becoming
increasingly popular with actuarial firms according to press and
other reports. Given the current and future issues presented to
fiduciaries with respect to the engagement of service providers with
contractual limitations of liability or indemnification provisions,
you have requested guidance from the Department concerning the
permissibility of such provisions under ERISA. |
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Section 404(a)(1) of ERISA requires, among other
things, that a fiduciary discharge his or her duties with respect to
a plan solely in the interest of the participants and beneficiaries
and with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of
an enterprise of like character with like aims. The prohibited
transaction provisions state, in section 406(a)(1)(C) and (D) of
ERISA, that a fiduciary with respect to an employee benefit plan
shall not cause the plan to engage in a transaction if he or she
knows or should know that such transaction constitutes a direct or
indirect furnishing of services between the plan and a party in
interest with respect to the plan, or transfer to, or use by or for
the benefit of, a party in interest, of any assets of the plan.
Section 408(b)(2) of ERISA provides a statutory exemption from the
prohibitions of section 406(a) for contracting or making reasonable
arrangements with a party in interest, including a fiduciary, for
office space, or legal, accounting, or other services necessary for
the establishment or operation of the plan, if no more than
reasonable compensation is paid for such services. |
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With regard to the selection of service providers
under ERISA, the Department has previously indicated that the
responsible plan fiduciary must engage in an objective process
designed to elicit information necessary to assess the
qualifications of the provider, the quality of services offered, and
the reasonableness of the fees charged in light of the services
provided. In addition, such process should be designed to avoid
self-dealing, conflicts of interest or other improper influence.
What constitutes an appropriate method of selecting a service
provider, however, will depend upon the particular facts and
circumstances. Soliciting bids among service providers is a means by
which a fiduciary can obtain the necessary information relevant to
the decision-making process, including information about contractual
provisions such as those identified in your letter relating to
limitations of liability and indemnification. |
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The Department does not believe that, in and of
themselves, most limitation of liability and indemnification
provisions in a service provider contract are either per se
imprudent under ERISA section 404(a)(1)(B) or per se unreasonable
under ERISA section 408(b)(2). The Department believes, however,
that provisions that purport to apply to fraud or willful misconduct
by the service provider are void as against public policy and that
it would not be prudent or reasonable to agree to such provisions.
Other limitations of liability and indemnification provisions,
applying to negligence and unintentional malpractice, may be
consistent with sections 404(a)(1) and 408(b)(2) of ERISA when
considered in connection with the reasonableness of the arrangement
as a whole and the potential risks to participants and
beneficiaries. At a minimum, compliance with these standards would
require that a fiduciary assess the plan’s ability to obtain
comparable services at comparable costs either from service
providers without having to agree to such provisions, or from
service providers who have provisions that provide greater
protection to the plan. |
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In the Department’s view, compliance with ERISA’s
fiduciary provisions, including section 408(b)(2), also would
require that a fiduciary assess the potential risk of loss and costs
to the plan that might result from a service provider’s act or
omission subject to a proposed limitation of liability or
indemnification provision. In making such an assessment, a fiduciary
should consider the potential for, and outside limits of, such a
loss, as well as any additional actions that may be available to the
plan to minimize such a loss. |
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This letter constitutes an advisory opinion under
ERISA Procedure 76-1. Accordingly, this letter is issued subject to
the provisions of the procedure, including section 10 relating to
the effect of advisory opinions. |
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Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations |
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