[Federal Register Volume 62, Number 245 (Monday, December 22, 1997)]
[Proposed Rules]
[Pages 66908-66920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33088]



[[Page 66907]]

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Part III





Department of Labor





_______________________________________________________________________



Pension and Welfare Benefits Administration



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29 CFR Part 2550



Insurance Company General Accounts; Proposed Rule

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

[[Page 66908]]



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.

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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: 
<a href="/cdn-cgi/l/email-protection#93f0fee3f2f7d3f9e3e4f1f2bdf7fcffbdf4fce5"><span class="__cf_email__" data-cfemail="ea89879a8b8eaa809a9d888bc48e8586c48d859c">[email protected]</span></a>.

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.<SUP>1</SUP>
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    \1\ Paragraph (b) of 29 CFR 2509.75-2 was removed effective July 
1, 1996, 61 FR 33847, 33849 (July 1, 1996).
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    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 mid-sized 
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

[[Page 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, Sec. 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

[[Page 66910]]

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).<SUP>2</SUP>
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    \2\ The 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.
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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 insurer-initiated 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 Sec. 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,

[[Page 66911]]

and the requirements of section 408(b)(5) of ERISA are met.<SUP>3</SUP>
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    \3\ This 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.
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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. <SUP>4</SUP>
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    \4\ This definition is substantially similar to the definition 
contained in New York insurance regulations. In this regard, see 11 
NYCRR 40.2 (1996).
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    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

[[Page 66912]]

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 
Sec. 401(c)(2)(B)) by ensuring that plans are not locked into 
economically disadvantageous relationships.<SUP>5</SUP> 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.
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    \5\ The proposal is similar to the Department's rule governing 
contracts between plans and service providers. See 29 CFR 
Sec. 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'').
---------------------------------------------------------------------------

    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 Sec. 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

[[Page 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.

[[Page 66914]]

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,

[[Page 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 pre-existing 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

[[Page 66916]]

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 for-profit 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. Sec. 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:
    <bullet> 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;
    <bullet> 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;
    <bullet> Enhance the quality, utility and clarity of the 
information to be collected; and
    <bullet> 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:


Sec. 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

[[Page 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

[[Page 66918]]

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 S-Part 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

[[Page 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 
insurer-initiated 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.

[[Page 66920]]

    (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


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