No-Action Letter under
|Re:||The Lincoln National Life Insurance Company|
Lincoln Financial Advisors Corporation
Request for No-Action Relief Section 403(b) Plans
Dear Mr. Scheidt:
We are writing on behalf of The Lincoln National Life Insurance Company ("Lincoln"), a stock life insurance company domiciled in and organized under the laws of the state of Indiana, and Lincoln Financial Advisors Corporation ("LFA"), a wholly-owned subsidiary of Lincoln. Lincoln and LFA are each registered as broker-dealers and are member firms of the National Association of Securities Dealers, Inc.1 This letter requests relief from the requirements of Section 5(b)(2) under the Securities Act of 1933, as amended (the "Securities Act"), and Section 30(e) and Rule 30e-1 under the Investment Company Act of 1940, as amended, (the "Investment Company Act") in connection with the delivery of prospectuses and annual and semi-annual reports under the Lincoln Alliance Program (the "Alliance Program"), a program for employee benefit plans, as described more fully below.
Lincoln and LFA are requesting this relief to standardize their practices for providing information to the various types of employee benefit plans that utilize the Alliance Program. Currently, the Alliance Program is available to plans that meet the requirements of any of Sections 401(a), 401(k), 403(b), 408, 451 or 457 of the Internal Revenue Code of 1986, as amended (the "Code"). Lincoln and LFA propose to conform the procedures they use for the delivery of prospectuses and annual and semi-annual reports to employees who participate in retirement benefit plans established under Section 403(b) of the Code (hereinafter "Section 403(b) plans")2 with the procedures they use for other retirement plans that utilize the Alliance Program, in particular retirement benefit plans established under Section 401(k) of the Code (hereinafter "Section 401(k) plans"). In this regard, Lincoln and LFA propose to deliver annual or evergreen prospectuses and annual and semi-annual reports for registered open-end management investment companies ("mutual funds") to employer sponsors of Section 403(b) plans who would make the prospectuses and reports available to participating employees.
Description of the Lincoln Alliance Program. Through the Alliance Program, Lincoln and LFA provide a package of services to mid-sized and large employers in connection with employee benefit plans.3 Lincoln developed the Alliance Program to meet the needs of employers who want to offer their employees retirement and/or deferred compensation benefit packages but prefer not to establish the infrastructure required to provide all the administrative and record-keeping services necessary to offer and maintain these benefits. As noted, these plans typically are designed to meet the requirements of Section 401(a), 401(k), 403(b), 408, 451 or 457 of the Code and may, depending on the plan sponsor and plan design, also be governed by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Lincoln and LFA may provide services for other types of employer-sponsored retirement and deferred compensation benefit plans in the future.
The terms and conditions for participation in the Alliance Program are established in an agreement (the "Recordkeeping Agreement") executed by the employer and Lincoln. Under the Recordkeeping Agreement, Lincoln agrees to provide record-keeping services for a retirement plan or deferred compensation plan (each a "plan") that utilizes the Alliance Program. Under the Recordkeeping Agreement Lincoln is required to provide all participant-level record-keeping regarding the following: plan eligibility and enrollment; contributions and allocations; rollovers and direct transfers to and from the plans; transfers among plan investment options; earnings and losses; plan loans; plan distributions; vesting and forfeitures; plan distribution restrictions; and tax withholding.4 Participant-directed plans, which require more extensive participant-level record-keeping services than non-participant-directed plans, are the primary recipients of such services. In general, Lincoln is compensated by the receipt of administrative fees paid by the mutual fund companies utilized in the Alliance Program. In some plans, however, the mutual funds may not pay administrative fees. In that case, Lincoln may charge an administrative fee, paid either by employers who sponsor plans for their employees ("plan sponsors") or directly by the plan participants.
The Alliance Program offers the plan sponsor a menu of investment options, such as shares of mutual funds, and participation in a Lincoln group fixed insurance contract, to fund plan benefits. Although the Code permits certain types of plans to be marketed directly to plan participants, Lincoln markets the Alliance Program only to plan sponsors. In each case, the plan sponsor, an investment committee or other fiduciary of the plan, in its sole discretion, selects the investment options to be made available to plan participants. In the typical case, these investment options include a selection of mutual funds. The Alliance Program follows an open architecture format which allows each plan sponsor or fiduciary to choose from an extensive menu of publicly available mutual funds. Mutual funds are available to the Alliance Program under selling agreements LFA has with numerous mutual fund groups.5 Plan sponsors or fiduciaries are not limited to these funds, however, and can request other mutual funds as well. LFA will use its best efforts to enter into selling agreements for those mutual funds.
Lincoln and LFA are responsible for ensuring that prospectuses and annual and semi-annual reports for mutual funds available through the Alliance Program are delivered to plan participants when and as furnished by the mutual funds or their affiliates. In addition, Lincoln and LFA are responsible for ensuring that plan participants receive reports, at least quarterly, detailing the allocation of participant account values among the options available through the Alliance Program.
Lincoln has entered into agreements with a bank and trust company (hereinafter, the "trust company") that call for the trust company to enter into an agreement with each Alliance Program plan sponsor whose plans have assets that will be held in trust or in a custodial account. When acting as a directed trustee for plans established under Code Sections 401(a), 401(k) or 457, the trust company holds assets of such plans in trust, but does not act as an investment adviser and has no responsibility for the investment of plan assets. The trust company may also act as custodian for retirement arrangements established under Code Sections 403(b)(7) and 408. In such arrangements, the trust company maintains a custody account for the plan, but does not have formal responsibility for investment of the assets of such accounts. In both cases, under the Alliance Program, plan participants provide investment instructions to the TPA, which then aggregates individual plan participant orders and transmits aggregated buy/sell information to the trust company. The trust company does not have any discretion regarding the investment of plan assets under any Alliance Program plan.
The TPA notifies the trust company of purchases and sales on a plan and fund basis only (i.e., the trust company does not receive information regarding individual plan participant transactions). The trust company, in turn, provides the TPA with prices and trade results.6 Contributions on behalf of plan participants (funded typically by salary reduction and employer contributions) are sent by wire transfer directly from the plan sponsor to the trust company.
The terms and conditions of the Recordkeeping Agreement make clear that Lincoln is not responsible for determining whether a particular plan or investment option is appropriate for the plan sponsor, the plan or any plan participant, and is not acting as the plan administrator, or fiduciary (within the meaning of ERISA7 or any other applicable state or federal law) as regards the selection of investment options made available through the Alliance Program. Lincoln exercises no control over the selection of mutual funds by plan sponsors and fiduciaries for their plans. Under a service agreement with Lincoln, plan sponsors agree that Lincoln has no duty to monitor the performance of investment selections other than investments in a Lincoln group insurance contract.
A Lincoln group insurance contract is offered to each plan participating in the Alliance Program. Currently, the Lincoln contract is a group fixed annuity that provides a guaranteed interest rate set on a quarterly basis.8 In the future, the Alliance Program plans to offer other investment vehicles, which include or may include investments in variable annuities and employer stock. The Alliance Program also offers plan sponsors the option of providing their employees a self-directed brokerage account which, depending on the type of plan, will permit individual participants to invest in stocks, bonds, mutual funds or other securities of their own choosing.
Section 403(b) Plans. By way of background, Section 403(b) of the Code permits employees of certain Section 501(c)(3) organizations, public schools and self-employed ministers or chaplains to make tax-deferred contributions to retirement plans subject to certain limitations. The most common way for plan participants to make contributions to Section 403(b) plans is through salary reduction agreements. A salary reduction agreement is an agreement between the employer and the employee under which the employee consents to a salary reduction or to forego a salary increase and the employer contributes that amount to the Section 403(b) plan. The salary reduction agreement may specify either a set dollar amount or a percentage of the employee's salary for contribution to the Section 403(b) plan. The Code currently limits annual salary reduction contributions to $10,500.
Under the Alliance Program, upon enrollment in the plan each participant in a Section 403(b) plan receives a package of materials that includes a description of the plan, salary reduction agreement, investment allocation form, disclosure statement describing the Lincoln group fixed insurance contract and a prospectus for each mutual fund available to the plan (the "enrollment kit"). The investment allocation form allows a participant to allocate contributions among the investment options available under the plan. The salary reduction agreement identifies for the plan participant the frequency with which the plan sponsor would periodically forward contributions to the trust company for investment. In connection with each systematic investment transaction, on the date the plan sponsor allocates plan participant contributions to a mutual fund, a participant's account is credited with a number of shares of that fund equal to the amount of the contribution, divided by the net asset value per share as of a specified time on that date.
The open architecture format of the Alliance Program allows plan sponsors or fiduciaries to select from an extensive menu of publicly available mutual funds as investment options for their Section 403(b) plans. The number of mutual funds selected as investment options for Section 403(b) plans participating in the Alliance Program currently ranges from 10 to 23 mutual funds. The Alliance Program, however, would not restrict the subsequent addition of new mutual funds as investment options by plan sponsors or fiduciaries where LFA is able to enter into selling agreements for those mutual funds.
Recent Development Movement Toward Section 403(b)(7) Custodial Plans and Reduced Role for Investment Program Sponsor. Section 403(b)(7) custodial plans have become increasingly popular in recent years,9 in substantial part because of tax law changes in the last several years that cause those custodial plans to function more like Section 401(k) plans,10 increased penetration of the retirement plan market by mutual funds and public interest in equity investments in general. The availability of mutual funds as investment options outside an annuity wrapper under Section 403(b)(7) plans is attractive to some plan sponsors. Prior to the adoption of subsection (7), the sponsor of a Section 403(b) plan would rely exclusively on the purchase of a group annuity contract to fund plan benefits. The group annuity contract would be either a fixed contract or a variable contract typically offering a limited menu of underlying mutual funds. If a fixed contract, the insurance company that offered the group contract would be responsible for the administration of the contract and use its general account investments to fund plan benefits. If a variable contract, the insurance company would also be responsible for the administration of the contract and select the underlying mutual funds, and often, establish the funds. The insurance company would also be responsible for the delivery of confirmations and prospectuses and annual and semi-annual reports to plan participants, and in many cases, the production of those materials.
Now Section 403(b)(7) plan sponsors may choose from a wide array of investment options to support plan benefits. The substantial majority of mutual funds available to Section 403(b)(7) plans typically are not affiliated with the recordkeeping firm administering the investment program for the plan, as is the case under the open architecture format of the Alliance Program. The recordkeeping firm is removed from the selection of investment options for the plan, their establishment and the production of materials made necessary by the disclosure and reporting requirements of the federal securities laws.
Overview. Mutual funds that sell their shares to employee benefit plans are typically subject to the full panoply of regulatory requirements under the federal securities laws,11 including the requirements governing the delivery of prospectuses under Section 5 of the Securities Act and annual and semi-annual reports under Section 30(e) and Rule 30e-1 of the Investment Company Act. Section 5(b)(2) of the Securities Act requires an issuer to deliver to each investor a current prospectus, which must precede or accompany confirmation of a sale. In the context of the continuous offer and sale of shares of registered investment companies, such as mutual funds, the Commission staff through the years has taken the position that each new purchase payment or transfer to a fund would be a sale for purposes of Section 5(b)(2), which would require the purchaser to have an updated or evergreen prospectus. In the case of a Section 403(b) plan providing for participant contribution through payroll deduction, regulatory practice has called for an updated or evergreen prospectus for each mutual fund that sells its shares to the plan, would need to be forwarded on an annual basis to each plan participant who purchased shares of the fund. Section 30(e) and Rule 30e-1 under the Investment Company Act would also require the delivery each year of the annual and semi-annual reports for those mutual funds to plan participants who purchased shares of the funds.
Moreover, under an ERISA-covered 403(b) plan, a plan administrator must also provide participants with a second layer of disclosure materials to satisfy its statutory obligations under ERISA. In all cases, plan participants would receive a summary plan description, and where the plan sponsor intends to rely on the safe harbor providing fiduciaries with relief from liability for participant investment selections under Section 404(c) of ERISA, the summary materials required by Section 404(c). The Section 404(c) summary materials would include: an explanation of the plan's status under Section 404(c), including the availability of the safe harbor for relief from liability; a description of the investment alternatives under the plan, including investment objectives and risk return characteristics, type and diversification of assets; identification of investment managers; explanation of the circumstances under which participants may give investment instructions and any limitations on such instructions under the plan; a description of any transaction fees and expenses that affect plan participant account balances; the identity and contact information for the person responsible for providing information on request and a description of the material that can be obtained upon request; and a copy of the most recent prospectus for any investment subject to the Securities Act when a participant makes an initial investment in such an investment, as well as additional materials that must be made available upon request.
Consequences of Compliance. Section 403(b) plan participants may experience information overload from the receipt of massive amounts of investment and retirement plan information, including the frequent receipt of confirmation statements and the receipt of numerous prospectuses and annual and semi-annual reports on a periodic basis. Depending on the number of mutual funds the plan participant selects for the investment of his or her contributions, this could easily translate into an enormous volume of material for the participant to review on an annual basis. Moreover, some fund groups do not tailor their prospectuses for the plans and plan participants that select their funds as investment options. In that case, plan participants who invest in one or more portfolios of a series fund may receive the prospectus for an entire series fund not just the prospectus for the portfolios in which they invest. Coupled with the complicated nature of investment risk disclosure and financial information found in mutual fund prospectuses and annual and semi-annual reports and the divergent formats used by various fund groups, plan participants may find it difficult to sift through massive amounts of information and identify changes in fund management and performance material to their retirement investment.
Compliance with the requirements to deliver separate evergreen prospectuses and annual and semi-annual reports to plan participants for those mutual funds in which plan participants invest entails substantial costs and administrative burdens for plan sponsors and plan participants. Lincoln estimates that the annual monetary cost, including the time spent by salaried employees, for the production and distribution of evergreen prospectuses and annual and semi-annual reports alone for the Alliance Program plan exceeds $675,000. This estimate does not include the production and distribution costs associated with confirmations. The annual costs of providing evergreen prospectuses and annual and semi-annual reports reflects, in part, a significant difference from the mailing costs associated with the use of other arrangements to fund plan benefits, such as a group variable annuity. Specifically, since Section 403(b)(7) plan participants may invest in numerous funds with different fiscal year ends, plan participants may receive prospectuses and annual and semi-annual reports each month of the year. By comparison the use of a group variable annuity contract may require the delivery of a product and underlying fund prospectuses, annual and semi-annual reports on a much less frequent basis.
Comparison of Alliance Program Practices for Section 401(k) Plans and Section 403(b)(7) Plans. The practice of delivering evergreen prospectuses and annual and semi-annual reports to participants of Section 403(b) plans is substantially different from the practice Lincoln follows in the context of Section 401(k) plans utilizing the Alliance Program. Under the Alliance Program, Lincoln delivers evergreen prospectuses and annual and semi-annual reports to plan sponsors of Section 401(k) plans who in turn make those materials available to plan participants. Plan participants have access to evergreen prospectuses and annual and semi-annual reports through the offices of the plan sponsor at their discretion and at plan benefit meetings. This practice affords plan participants access to the information they need to verify and evaluate the status of their retirement investments and have not engendered much, if any, criticism from either plan sponsors or plan participants.
The use of a different practice for the delivery of evergreen prospectuses and annual and semi-annual reports in the Section 403(b) plan context makes little, if any, sense from the perspective of ensuring that plan participants have access to the information they need to verify and evaluate the status of their investments. Adequate procedures currently exist to ensure participants in Section 401(k) plans have access to the information to undertake these determinations. From a cost perspective, it is difficult to justify the practices mandated for the delivery of prospectuses and annual and semi-annual reports in the Section 403(b) plan context. The cost to the plan sponsor and plan participant is significantly higher in the context of a Section 403(b) plan than a Section 401(k) plan of comparable size with a comparable menu of investment options.
Lincoln and LFA propose to follow procedures for the delivery of materials similar to the procedures they follow for Section 401(k) plans. Described in detail below are the procedures Lincoln and LFA propose to follow.
At the time of enrollment, the enrollment kit would provide each plan participant a statutory prospectus for each mutual fund available as an investment option to the plan. Lincoln would undertake to ensure that each plan participant receives a statutory prospectus for each mutual fund that becomes available as a new investment option to the plan promptly upon its availability to the plan. Lincoln would forward a sufficient number of mutual fund prospectuses to each plan sponsor to enable the plan sponsor to fulfill its obligations in this regard.
Under the terms of the Recordkeeping Agreement, Lincoln would undertake to provide the plan sponsor with any amendments and supplements to the prospectuses for as long as the mutual funds remained available as investment options to the plan. Plan sponsors would undertake to inform plan participants of the availability of such amendments and supplements for review during normal business hours at the administrative offices of the plan sponsor. Lincoln would undertake to forward copies of each amendment and supplement to a plan sponsor in a quantity representing approximately 10% of the participants under the plan. Lincoln would also undertake to forward additional copies of amendments and supplements upon request from the plan sponsor.
Lincoln would also undertake to forward on an annual basis to each plan sponsor annual or evergreen prospectuses for each mutual fund currently available as an investment option to the plan in a quantity representing approximately 10% of the participants under the plan. Lincoln would also undertake to forward additional evergreen prospectuses upon request from the plan sponsor. Plan sponsors would undertake to make the prospectuses available to plan participants at their administrative offices and at periodic plan benefit meetings. Lincoln would undertake to forward an evergreen prospectus directly to a plan participant upon request from the plan sponsor, LFA or the plan participant. The enrollment package would also include a toll-free telephone number plan participants could use to contact Lincoln directly and request a copy of an evergreen prospectus for a mutual fund available to the plan.
Lincoln would adopt identical procedures for forwarding annual and semi-annual reports. Lincoln would undertake to forward to the plan sponsor annual and semi-annual reports for each mutual fund available as an investment option to the plan in a quantity representing approximately 10% of the participants under the plan. Lincoln would also undertake to forward additional annual and semi-annual reports upon request from the plan sponsor. Plan sponsors would undertake to make reports available to plan participants at their administrative offices and at plan benefit meetings. Lincoln would undertake to forward an annual or semi-annual report directly to a plan participant upon request from the plan sponsor, LFA or the plan participant. Plan participants would also be able to use the toll-free telephone number to contact Lincoln directly and request a copy of the current annual or semi-annual report for a mutual fund available to the plan.
The primary purpose of the Securities Act is to prevent the public offer and sale of securities unless information adequate for informed decision-making has been made available to the purchaser. One provision designed to achieve this goal is Section 5 of the Securities Act. Among other things, Section 5(b)(2) of the Securities Act requires an issuer to deliver to each investor a current prospectus, which must precede or accompany confirmation of a sale. As discussed above, in the context of the continuous offer and sale of shares of mutual funds, the Commission staff takes the position that each new purchase payment or transfer to a fund would be a sale for purposes of Section 5(b)(2), which would require the purchaser to have an updated or evergreen prospectus.12
With regard to the delivery of evergreen prospectuses to Section 403(b) plans participating in the Alliance Program, however, there appears to be no strong policy reason to require the delivery of a separate evergreen prospectus to each plan participant who allocates contributions to a fund. For the reasons discussed below, it would be entirely appropriate to deliver evergreen prospectuses to plan sponsors who would make the prospectuses available to plan participants and ensure participants have the information they need to request copies of evergreen prospectuses at their discretion.
The delivery of evergreen prospectuses to each plan participant under a Section 403(b) plan participating in the Alliance Program imposes significant costs upon the plan, and ultimately plan participants, from which neither would derive any discernable benefit, particularly in view of the availability of evergreen prospectuses at the administrative offices of the plan sponsor and at plan benefit meetings. Each plan participant would have access to the evergreen prospectus for each mutual fund available to the plan through the plan sponsor and could request a copy of each prospectus directly from Lincoln free of charge. Even in the absence of separately delivered evergreen prospectuses, each plan participant would continue to have access to those documents at his or her discretion.
Lincoln's and LFA's proposal to deliver evergreen prospectuses to plan sponsors already is standard practice for participant-directed Section 401(k) plans utilizing the Alliance Program. In the Section 401(k) plan context, statutory prospectuses are delivered to the employer sponsor. Employers typically make the prospectuses available to employees, both through their benefits department and at in-person meetings. In addition, Lincoln has undertaken to forward to plan participants the prospectuses for the funds in which they invest or will invest under their plan upon request.
From the perspective of ensuring the provision of information adequate for informed decision-making, there appears to be little, if any, reason to distinguish the treatment of participant-directed Section 401(k) plans from the Section 403(b) plans participating in the Alliance Program with regard to the delivery of evergreen prospectuses. In each case, the plan participant directs the investment of his or her own contributions among a menu of mutual funds available under the plan, and in each case, a plan sponsor undertakes to ensure that plan participants have access to the prospectuses for those funds.13
Lincoln's and LFA's proposal to deliver evergreen prospectuses to plan sponsors would also help to limit the massive amounts of complicated printed information many plan participants receive on an annual basis. From the perspective of the plan participant, each year the plan participant may receive numerous prospectuses, annual and semi-annual reports as well as plan disclosure documents. The volume of the information can make it difficult for plan participants to read through, much less comprehend, the information in any meaningful way.
Notably, it appears that the Commission staff has considered the practice of delivering evergreen prospectuses to plan sponsors in the Section 403(b) plan context in granting no-action assurance in a 1997 letter to Aetna Life Insurance and Annuity Company (hereinafter the "Aetna Letter").14 Although the Aetna Letter stands expressly for the proposition that an advertisement qualifying under Rule 482 of the Securities Act could accompany forms providing for employee participation in a group variable annuity contract and allocation of contributions among investment options, there are extensive references in both the Commission staff's response letter and the original request letter of Aetna's practices for forwarding prospectuses, amendments and supplements. Those references provide that Aetna would deliver prospectuses, and all amendments and supplements thereto, to plan sponsors so that such materials would be available to plan participants from the sponsor. In light of these statements, an inference can reasonably be drawn from the Aetna Letter that the Commission staff has not objected to the practice of delivering prospectuses for group variable annuity contracts and underlying mutual funds only to plan sponsors and not directly to plan participants.
Section 30(e) of the Investment Company Act and Rule 30e-1 thereunder require registered mutual funds to provide annual and semi-annual reports containing financial statements and other financial information to shareholders of record. As in the case of the delivery of evergreen prospectuses to Section 403(b) plans participating in the Alliance Program, there appears to be no strong policy reason to require delivery to each plan participant of a separate annual and semi-annual report for each fund to which the participant allocates contributions. For the reasons discussed below, we submit it would be entirely appropriate to deliver annual and semi-annual reports using the same procedures proposed for the delivery of evergreen prospectuses.
The reasons supporting the delivery of evergreen prospectuses to plan sponsors of Section 403(b) plans participating in the Alliance Program also support the use of that procedure for the delivery of annual and semi-annual reports. Under the proposed procedure, each participant of a Section 403(b) plan would have access to the annual and semi-annual report for each mutual fund available to the plan through the plan sponsor and, at his or her discretion, could request a copy of each report directly from Lincoln free of charge. As such, requiring the delivery of annual and semi-annual reports directly to plan participants would not provide participants with any additional benefit but would impose significant costs upon the plan which would likely be passed on to plan participants.
The delivery of annual and semi-annual reports to plan sponsors would help ameliorate the burden many participants of Section 403(b) plans face from the receipt of potentially massive amounts of investment and plan information. Reducing this burden would only facilitate improved decision-making on the part of plan participants. No doubt, at least in part for these reasons, similar procedures have been adopted for participant-directed Section 401(k) plans.
On behalf of Lincoln and LFA, we request that the Commission staff take a "no-action position" that would permit the delivery of evergreen prospectuses and annual and semi-annual reports to plan sponsors who would make those materials available to plan participants.
* * *
We appreciate the Commission staff's consideration of this request. Please contact Thomas E. Bisset at 202/383-0118 or Susan S. Krawczyk at 202/383-0197 if you need additional information regarding the Lincoln Alliance Program described in this letter.
Very truly yours,
Susan S. Krawczyk
Thomas E. Bisset
1 Lincoln is registered as a limited purpose broker-dealer for the sole purpose of selling variable insurance products that it issues. Lincoln will not be relying on this registration in connection with the Lincoln Alliance Program.
2 Section 403(b) plans are tax-advantaged retirement accounts for employees of public schools, state colleges and universities, and charitable institutions exempt from taxation under Section 501(c)(3) of the Code. A tax exempt organization described in Section 501(c)(3) of the Code is one which is organized and operated exclusively for religious, charitable, scientific, public safety testing, literary, or educational purposes, or to encourage amateur sports competition, or for the prevention of cruelty to children or animals. Code Section 501(c)(3).
3 For ease of reference, the Alliance Program is described in detail in a separate no-action letter request previously submitted to the SEC Staff in connection with the de-registration of Lincoln and Lincoln Life & Annuity Company of New York, a stock life insurance company domiciled in and organized under the laws of the state of New York and a wholly-owned subsidiary of Lincoln, as transfer agents. See No-Action Request by The Lincoln National Life Insurance Company, et al. in Connection with Recordkeeping Services for Employee Benefit Plans, submitted to the SEC Staff in draft form on May 30, 2001.
4 Lincoln has delegated the function of providing participant-level record-keeping services to an unaffiliated third party administrator ("TPA"). The TPA, as agent for Lincoln, receives information from the plan sponsor regarding contribution amounts allocable to individual plan participants, and processes orders received for purchases, sales and other plan transactions with respect to each participant. The TPA maintains a database of plan participant transactions. The database contains information unique to each plan participant, such as the participant's social security number, date of birth, date of hire, years of service, investment elections and beneficiaries. The TPA also compiles, retains, and provides information necessary for compliance with applicable reporting and disclosure requirements of the Code and, where applicable, ERISA.
The TPA also maintains a "voice response system" and an internet service center that allows plan participants to convey instructions regarding the investment of their contributions to the Recordkeeper. For example, a plan participant may use the voice response system to change his or her investment allocations. The TPA then aggregates on a daily basis individual plan participant orders and communicates this information, and any other instructions it has received from the plan sponsor or an individual plan participant, to the plan trustee or custodian.
5 LFA currently has selling agreements with approximately 30 mutual fund families covering more than 250 mutual funds.
6 In the case of investments in mutual funds, trades are communicated by the trust company to the various mutual funds through "FundServ," a service offered by the National Securities Clearing Corporation ("NSCC"). Prices for mutual funds are provided to the trust company by NSCC.
7 A sponsor of an ERISA-covered plan is considered a plan fiduciary to the extent it retains discretionary authority and control with respect to the plan and its assets for any functions that are not settlor functions. ERISA "fiduciaries" are charged with acting solely in the interests of plan participants and beneficiaries.
8 With regard to its group fixed insurance contracts, Lincoln relies on the exclusion from regulation under the federal securities laws found in Section 3(a)(8) of the Securities Act available to insurance companies that issue insurance, endowment policies, annuity contracts or optional annuity contracts. As such, Lincoln and LFA are not requesting relief in connection with Lincoln's group fixed insurance contract business under the Alliance Program.
9 Section 403(b) of the Code requires the investment of plan assets exclusively in either annuity contracts or, under Code Section 403(b)(7), shares of mutual funds held in custodial accounts meeting certain requirements applicable to accounts for qualified pension plans under Section 401(a) of the Code ("403(b)(7) plans"). With respect to 403(b)(7) plans, plan assets must be held by a bank or another person who the Internal Revenue Service determines is capable of administering the plan. Code Section 401(f)(2). As noted above, the trust company currently performs this custodial function for Alliance Program plans.
10 Without amending the Code, the Small Business Job Protection Act of 1996 (the "Small Business Act"), implemented changes that provided additional flexibility to participants of Section 403(b) plans to make elections for salary reduction. The Small Business Act liberalized restrictions on plan participant elections to permit elections more frequently than once per year, allow elections to cover compensation earned during the current payroll period and revoke elections for compensation earned while the election was in effect. These modifications were intended to help standardize the rules governing elections between Section 401(k) and Section 403(b) plans. See H.R. Rep. No. 586, 104th Cong., 2d Sess. 64 (1996).
11 The treatment of mutual funds differs markedly from the treatment of collective trust funds and insurance company separate accounts in the qualified plan context. Specifically, Section 3(a)(2) of the Securities Act exempts from registration any interest or participation in single or collective trust funds maintained by a bank or any security arising out of a contract issued by an insurance company, which interest, participation or security is issued in connection with: (1) a qualified plan, (2) certain annuity plans, and (3) certain government plans. A qualified plan, for purposes of Section 3(a)(2), includes, among other things, a plan that qualifies under Section 401(a) of the Code, including a Section 401(k) plan. An annuity plan, for purposes of Section 3(a)(2), does not include a 403(b) annuity. Likewise, Section 3(c)(11) of the Investment Company Act excludes from the definition of an investment company, both qualified plans and government plans referenced in Section 3(a)(2) of the Securities Act as well as bank collective trust funds consisting solely of assets of such plans. It also excludes from this definition, insurance company separate accounts the assets of which are derived solely from such qualified plans and government plans as well as plans meeting the requirements of Section 404(a) of the Code and seed money contributed by the insurance company. Collective trust funds and separate accounts that issue their shares exclusively to such qualified plans rely on these exemptions to avoid registration under the Securities Act and the Investment Company Act.
12 The Securities Act would not require a mutual fund to send an evergreen prospectus where the shareholder does not make additional purchases of fund shares. See Investment Company Act Release No. 22884 n.1 (Nov. 13, 1997).
13 Like participants in Section 401(k) plans, participants in Section 403(b) plans utilizing the Alliance Program would continue to benefit from the substantive protections of the federal securities laws. In all cases, the provisions of the Investment Company Act against conflicts of interest and self-dealing would continue to apply to mutual funds that serve as investment options for plan participants. The sale of shares of mutual funds to plan participants would continue to be fully subject to the antifraud provisions of the Investment Company Act, the Securities Act and the Securities Exchange Act of 1934.
14 Aetna Life Insurance and Annuity Company (pub. avail. Jan. 6, 1997).
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