Advisory Opinion 2000-15A

November 15, 2000

Stephen M. Saxon, Esquire
Groom Law Group
1701 Pennsylvania Avenue, NW
Washington, DC 20006-5893

2000-15A
  • PTE 84-24

Re: Teachers Insurance and Annuity Association of America (TIAA) and the College Retirement Equities Fund (CREF)(together, TIAA-CREF)
       Identification Number: C-09178

Dear Mr. Saxon:

This is in response to your letter requesting an advisory opinion concerning the application of Prohibited Transaction Exemption 84-24 (49 FR 13208, April 3, 1984)(PTE 84-24) to transactions involving certain individual retirement annuities (IRAs) offered by TIAA-CREF.

You represent that TIAA is a nonprofit stock insurance company organized in 1918 as a corporation under the laws of the State of New York which offers group and individual fixed annuities, with a guarantee of principal and specified rates of interest. In addition, you state that TIAA offers group and individual variable annuities funded by a real estate separate account. TIAA also offers life insurance, long-term disability insurance, and long-term care insurance.

You describe CREF, which is the companion organization to TIAA, as a nonprofit corporation established under the laws of the State of New York in 1952. You represent that CREF is registered with the Securities and Exchange Commission as an investment company under the Investment Company Act of 1940, is subject to periodic inspection of the New York State Insurance Department and is licensed as an insurance company under the laws of other states. You further represent that CREF offers group and individual variable annuity contracts through which participants may invest in a number of securities issued by CREF, including a stock fund, a money market fund, bond fund, inflation-linked bond fund, social choice fund, global equities fund, equity index fund, and a growth fund.

You represent that, together, TIAA and CREF provide the principal retirement annuity funding system for educational and research organizations in the United States. You explain that typically, TIAA-CREF issues individual annuity contracts to participants to provide funding for pension plans sponsored by educational and research organizations. These plans are usually participant-directed defined contribution plans described in sections 401(a), 403(a), 403(b), and 457 of the Internal Revenue Code of 1986 (the Code). You note that TIAA-CREF also offers individual annuity contracts constituting IRAs described in sections 408 and 408A of the Code that may be established by employees of these educational and research organizations. TIAA-CREF offers its own employees the opportunity to establish TIAA-CREF IRAs. These TIAA-CREF IRA contracts are issued on the same terms as contracts issued to non-TIAA-CREF employees. In addition, TIAA-CREF does not sponsor, maintain, or contribute to these TIAA-CREF IRAs. All fees charged in connection with the IRA are identical irrespective of whether the IRA is established by a TIAA-CREF employee or a non-TIAA-CREF employee. You have asked us to assume that the IRA's established by TIAA-CREF employees do not constitute employee pension benefit plans within the meaning of section 3(2) of ERISA.(1)

You ask whether PTE 84-24 provides exemptive relief for the transactions described in section III of the exemption if the transaction involves TIAA-CREF and a TIAA-CREF IRA which is held by a non-TIAA-CREF employee.(2) If such relief is available under PTE 84-24 for IRAs, you also ask if the the the exemption would cover transactions involving TIAA-CREF and a TIAA-CREF IRA where the holder of the IRA is an employee of TIAA-CREF.

PTE 84-24 provides a conditional exemption from sections 406(a)(1)(A) through (D) and 406(b) of ERISA and the taxes imposed by 4975 of the Code for transactions relating to the purchase with plan assets of certain insurance products or investment company securities and the receipt of sales commissions in connection with such purchases by insurance agents or brokers, pension consultants, and investment company principal underwriters.

PTE 77-9, the predecessor to PTE 84-24, was originally issued jointly by the Department of Labor and the Internal Revenue Service.(3) Neither PTE 77-9 nor PTE 84-24 defined the scope of the term "plan" as used in the exemptions. We note that generally an IRA is not considered an "employee pension benefit plan" within the meaning of section 3(2) of ERISA. However, section 4975(e)(1) of the Code specifically defines the term "plan" to include IRAs. Since PTE 77-9 was jointly issued by the Department and the Service, we are of the view that the term "plan" as used in PTEs 77-9 and 84-24 includes a plan described in section 4975(e)(1) of the Code. Therefore, an IRA described in section 4975(e)(1) of the Code would be covered by the relief provided in PTE 84-24, if all of the relevant conditions therein are met.

With respect to the TIAA-CREF IRAs that have been adopted by TIAA-CREF employees, you express concern that TIAA-CREF may be precluded from using PTE 84-24 as a result of the application of section V(a)(4) of the exemption. Section V(a)(4) provides that the insurance agent or broker, pension consultant, insurance company, or investment company principal underwriter is not "an employer any of whose employees are covered by the plan." In this regard, you represent that the IRAs made available by TIAA-CREF to its employees are offered on the same terms as to employees of educational and research institutions and do not constitute "employee pension benefit plans" within the meaning of section 3(2) of ERISA and the regulations promulgated thereunder. In addition, with respect to TIAA-CREF IRA contracts and program materials, TIAA represents that only one set of IRA contracts and program materials are available and, as a result, the contract, fees, and services applying to TIAA employees are identical to the contract, fees, and services applying to any TIAA eligible IRA holder.

PTE 84-24 does not define the term "employer" as used in the exemption. ERISA section 3(5), however, which defines the term "employer" for plans within the jurisdiction of Title I, is helpful in interpreting this provision. Section 3(5) of ERISA provides, in part, that an employer is any person acting directly as an employer in relation to an employee benefit plan. Your determination that TIAA-CREF IRAs are not employee benefit plans under section 3(2) of ERISA presupposes that TIAA-CREF has no involvement with the IRAs in its capacity as an employer of TIAA-CREF employees. Accordingly, the Department believes that the limitation in section V(a)(4) of PTE 84-24 does not apply to transactions involving TIAA-CREF IRAs that have been adopted by TIAA-CREF employees, if all the relevant conditions therein are met.

This opinion relates solely to the specific issues raised by your request. Thus, the opinion should not be viewed as an endorsement of the overall arrangement for the provision of services and products to IRAs by TIAA-CREF and its affiliates. For example, the Department is expressing no opinion with respect to the provision of services and the receipt of fees by the Trust Company.(4)

This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, this letter is issued subject to the provisions of the procedure, including section 10, thereof relating to the effect of advisory opinions.

Sincerely,

Ivan Strasfeld
Director Office of Exemption Determinations

Footnotes

  1. Regulation 29 CFR Section 2510.3-2(d) provides that for purposes of Title I of the Act, the terms "employee pension benefit plan" and "pension plan" shall not include an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Internal Revenue Code of 1954 (hereinafter "the Code") and an individual retirement bond described in section 409 of the Code, provided that:

    1. no contributions are made by the employer or employee association;

    2. participation is completely voluntary for employees or members;

    3. the sole involvement of the employer or employee organization is without endorsement to permit the sponsor to publicize the program to employees or members, to collect contributions through payroll deductions or does checkoffs and to remit them to the sponsor; and

    4. the employer or employee organization receives no consideration in the form of cash or otherwise, other than reasonable compensation for services actually rendered in connection with payroll deductions or dues checkoffs.

  2. Section III of PTE 84-24 exempts the following transactions, if the conditions of the exemption are met:

    1. The receipt, directly or indirectly, by an insurance agent or broker or a pension consultant of a sales commission from an insurance company in connection with the purchase, with plan assets of an insurance or annuity contract.

    2. The receipt of a sales commission by a principal underwriter for an investment company registered under the Investment Company Act of 1940 (hereinafter referred to as an investment company) in connection with the purchase, with plan assets, of securities issued by an investment company.

    3. The effecting by an insurance agent or broker, pension consultant or investment company principal underwriter of a transaction for the purchase, with plan assets, of an insurance or annuity contract or securities issued by an investment company.

    4. The purchase, with plan assets, of an insurance or annuity contract from an insurance company.

    5. The purchase, with plan assets, of an insurance or annuity contract from an insurance company which is a fiduciary or a service provider (or both) with respect to the plan solely by reason of the sponsorship of a master or prototype plan.

    6. The purchase, with plan assets, of securities issued by an investment company from, or the sale of such securities to, an investment company or an investment company principal underwriter, when such investment company, principal underwriter, or the investment company investment adviser is a fiduciary or a service provider (or both) with respect to the plan solely by reason of: (1) The sponsorship of a master or prototype plan; or (2) the provision of nondiscretionary trust services to the plan; or (3) both (1) and (2).

  3. 42 FR 32395 (June 24, 1977)

  4. We note that your letter discusses investment advice services that may be provided to the TIAA-CREF IRAs by TIAA-CREF and its affiliates. In this regard, you have not asked whether PTE 84-24 is applicable to a formal advice program under which specific recommendation concerning asset allocations are made available to plan participants for a separate fee following the completion of questionnaires. PTE 84-24 provides relief for the receipt of sales commission by a principal underwriter for the effecting by the principal underwriter of a purchase with plan assets of investment company securities. The Department notes, however, that at the time PTE 77-9 (PTE 84-24 amended PTE 77-9) was granted, relief was provided because of concerns that the recommendations provided by mutual fund principal underwriters could constitute the provision of "investment advice" under ERISA. If the mutual fund principal underwriter was a fiduciary as a result of the provision of investment advice, the receipt of commissions in connection with the purchase of recommended securities would violate section 406(b) of ERISA. It is the Department's view that PTE 84-24 would not provide relief for any prohibited transaction that may arise in connection with the receipt of any fees or other compensation separate and apart from the commission paid to a principal underwriter upon a plan's purchase of recommended securities. Thus, PTE 84-24 does not exempt any prohibited transaction arising out of transactions involving fees paid to a fiduciary service provider with respect to an advice program which provides specific/individualized asset allocation recommendations to participants based on their responses to questionnaires. See, e.g. PTE 97-60, 62 FR 59744 (Nov. 4, 1997) (TCW Group, Inc. et al.); PTE 97-12, 62 FR 7275 (Feb. 18, 1997) (Wells Fargo Bank, N.A.); PTE 96-59, 61 FR 40000 (July 31, 1996) (PaineWebber Incorporated); and PTE 93-59, 58 FR 47290 (Sept. 8, 1993) (Prudential Mutual Fund Management, Inc.).