66908 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules

1Paragraph (b) of 29 CFR 2509.75–2 was removed

effective July 1, 1996, 61 FR 33847, 33849 (July 1,

1996).

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.

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

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 midsized 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
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules 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, § 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
66910 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules

2The 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.

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

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 insurerinitiated 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 § 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,
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules 66911

3This 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.

4This definition is substantially similar to the

definition contained in New York insurance

regulations. In this regard, see 11 NYCRR 40.2

(1996).

and the requirements of section

408(b)(5) of ERISA are met.3

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

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
66912 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules

5The proposal is similar to the Department’s rule

governing contracts between plans and service

providers. See 29 CFR § 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’’).

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 § 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.

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 § 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
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules 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.
66914 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules

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,
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules 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 preexisting 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
66916 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules

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 forprofit 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. § 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:

§ 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
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules 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
66918 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules

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 SPart 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
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules 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 insurerinitiated 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.
66920 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Proposed Rules

(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