Summary:

• Under the Employee Retirement Income Security Act of 1974 (ERISA), the Employee Benefits Security Administration (EBSA), a branch of the U.S. Department of Labor, is responsible for the pivotal oversight of pension plans.  This crucial legislation plays a significant role in ensuring the protection of pension plan investors and enforces provisions that diligently safeguard their security.  The importance of ERISA compliance cannot be overstated, as it is the cornerstone of the pension plan’s operations and the key to maintaining the trust and confidence of the investors.

https://www.dol.gov/general/topic/retirement/erisa

The Internal Revenue Service (IRS) plays a significant role in governing individual retirement accounts (I.R.A.s).  Non-bank trustees or custodians must prove to the IRS that they can meet regulatory requirements and ensure the safety and security of their accounts.  The IRS sets guidelines for managing funds in a manner that complies with tax laws and regulations, ensuring the safety and security of the accounts to protect the retirement savings of account holders.  This includes requirements for reporting and record-keeping, as well as rules for permissible investments and distributions.  Trustees must understand and adhere to these rules to ensure compliance with IRS regulations and ERISA.

https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras

Article:

Real estate lenders and mortgage brokers often facilitate real estate trust deed investments for private party pension trustees’ funds.   As the primary figure in managing the pension fund, the trustee signs on behalf of the plan.  This action effectively makes the pension fund the lender(s) affixed to the promissory notes and deeds of trust, as the designated beneficiaries.  They are also listed as the designated beneficiaries on the title insurance policies.  The trustee’s role is pivotal and significant as they are responsible for managing the pension fund, making investment decisions on behalf of the plan, and ensuring compliance with ERISA regulations.  This includes reviewing proposed trust deed investment transactions, including material disclosure documents, to make a final investment decision and acting as the plan’s fiduciary with the ultimate authority to act on behalf of the pension plan.  The trustee’s responsibilities also include monitoring the investment’s performance, ensuring the investment’s safety and security, and making decisions that are in the plan’s and its beneficiaries’ best interest.  This means they must consider the risk and return of the investment, the potential conflicts of interest, and the Impact on the plan’s overall portfolio.

A pension investor, governed by ERISA, may hold the title as a single investor by purchasing 100% of the note and deed of trust.  Alternatively, the plan investor may also buy fractional shares of the note and deed of trust as tenants in common with other investors.  This means that multiple investors hold their fractional shares as tenants in common, sharing the benefits and risks of the investment proportionally to their respective shares.

It is usually advisable for a plan to take the majority of the trust deed investment.  This majority investment ensures the plan has a controlling interest in decision-making, instilling a sense of control and confidence in the trustees and investors.

Compliance with federal Law under ERISA is not just a requirement, but a crucial aspect that must be adhered to.  It mandates that plan trustees, the key decision-makers, make fiduciary decisions, not the lender or mortgage broker responsible for arranging the loan transaction with the Borrower.  The plan trustees are not only responsible for reviewing proposed trust deed investment transactions, including material disclosure documents, but also for making a final investment decision.  They are the plan’s fiduciary and have the ultimate authority to act on behalf of the pension plan.  Their role is pivotal as they make investment decisions to ensure they comply with ERISA regulations, which is paramount.

Understanding the Potential Conflicts in Legal Requirements under ERISA and California State Law

A plan trustee cannot delegate fiduciary responsibilities to a lender or mortgage broker, as the critical decision is whether to invest in the plan.

A plan trustee is crucially the key decision-maker when investing plan assets.  The trustee may seek outside independent investment advice from a qualified professional advisor.  An advisor can assist the plan trustee by providing a qualified yes or no or by asking for more information to make a prudent investment decision.  The advisor’s role is to provide unbiased and informed advice to the trustee, helping them make the best investment decisions for the plan.  This underscores the weight of the trustee’s responsibility and their empowerment in making investment decisions.

When exercising discretionary decisions as the plan’s trustees, they act under Federal Law as fiduciaries.  I.R.A. resource pamphlets are available on the Internal Revenue Service’s website, specifically Publication 590-A and 590-B.  The IRS has adopted the same fiduciary rules created by the Department of Labor for pension plan investments.

A licensed mortgage broker/lender making or arranging loan transactions with the expectation of compensation, as required by California State Law, is a fiduciary regarding potential trust deed investors.  Pension plan trustees, acting on behalf of the plan, purchase these promissory notes and trust deeds secured by real property as a common investment strategy.

The mortgage broker/lender who provides services to the ERISA plan is a party in interest.  There is an inherent conflict when the broker/lender expects origination fees, underwriting fees, documents, and miscellaneous fees to be paid at closing.

A mortgage broker/lender acting as the servicing agent also expects to receive small fractional amounts for servicing income, paid by the ERIAS investor for the life of the loan.  Loan servicing functions are considered a ministerial responsibility.

Empowering the ERISA Plan Trustee: The Sole Decision Maker for the Investment

Fiduciary:

Understanding the definitions: A comprehensive guide for plan trustees and legal counsel.

Any person who:

• Exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,
• Renders investment advice for a fee or other compensation, direct or indirect, concerning any money or other property of such plan, or has any authority or responsibility to do so, or
• Does it have any discretionary authority or discretionary responsibility in administering such a plan?  Such term includes any person designated under Section 405(c)(1)(B) of the Employee Retirement Income Security Act of 1974.

Party-in-interest:

Definition of party-in-interest.

This situation requires transparency and a steadfast commitment to ethical conduct to ensure the integrity of the investment process.  Mortgage brokers and lenders, as parties in interest, should be particularly mindful of potential conflicts of interest when providing services to the plan.  For instance, a broker or lender may be tempted to recommend a higher-risk investment that offers a higher return, but this may not be in the best interest of the plan.  Holding these values is not just a requirement, but a crucial aspect of the trustee’s role in maintaining the plan’s integrity and the trust of its investors.

Prohibited Transactions:

Under S406(a) of ERISA, a plan fiduciary is prohibited from causing a plan to decide to invest in a transaction if he knows, or should know, that such transaction constitutes a direct or indirect:

• Sale or exchange of any property between the principal and a party-in-interest.
• The lending of money or other extensions of credit between the plan and a party in interest.
• The furnishing of goods, services, or facilities between the plan and a party in interest.
• Transfer to or use by, or for the benefit of, a party-in-interest of any plan assets.

In other words, a lender or broker could not take title to a trust deed investment or real property and sell it to an ERISA investor.

However, ERISA regulations require the Plan’s Trustee(s) to make management decisions and exercise discretion when engaging in or servicing pension plan investments.  Accordingly, the Pension Plan Trustee(s) and their independent, qualified professional advisors must perform as fiduciaries of the pension plan, as defined under Federal Law.

A lender or broker is encouraged to create a loan servicing agreement that provides for delegated rights, as specified in writing, to the servicer by the plan administrator.  Delegated rights are necessary, as opposed to absolute rights, such as a power of attorney.  Listing delegated responsibilities from the plan trustee or administrator shows that the plan is the fiduciary, not the broker or the lender.

Discretionary decisions made by the Pension Plan Trustee(s) and their independent, qualified professional advisors include, but are not limited to:

• Approving company underwriting guidelines for prospective loan transactions (trust deed investments) considered for plan investment purchases.
• Should the plan proceed to invest in a loan transaction (trust deed investment)?
• Decisions relating to loan servicing
• Decisions about when and how to foreclose in the event of default by the Borrower.
• A foreclosure trustee, under the power of sale, makes decisions about how credit bidding proceeds at a sale.
• Decisions about what actions should be taken if the Borrower files a bankruptcy petition under Federal Bankruptcy laws.
• Decisions on whether the loan transaction (trust deed investment) should be renegotiated, compromised, extended, or settled in a manner distinguishable from the loan terms described in the promissory note, deed of trust, or loan agreement.  The same applies to mortgage instruments in states that use these documents.
• Decisions on the disposition and management of the asset in the event of a fully executed foreclosure will be made when the plan becomes the real estate owner.
• Decisions on when and who should be engaged as legal counsel to represent the plan, as may be required to carry out any proceeding.

Lenders and mortgage brokers should create forms prepared for the plan’s review and completion by the program’s trustee(s), which will assist in carrying out the responsibilities of the plan’s fiduciaries.

These forms are designed to assist lenders or mortgage brokers in submitting proposed loan transactions (trust deed investments) to the plan, enabling them to be considered for investment in the plan.

The forms are titled:

• Checklist of plan underwriting guidelines.
• The plan trustee questionnaire and certification will be executed by the plan trustee(s).
• The forms will be maintained in the lenders’ or mortgage brokers’ digital files and guide the types of transactions the investment plan will consider.
• The mortgage broker may recommend that the plan trustees not proceed with a loan transaction without independent investment advice from qualified professionals.
• The additional forms outlined below may be used for the plan’s review so that the plan trustee(s), the plan’s independent professional advisors, and the plan’s legal counsel will be aware (in advance)of the type of information the broker will provide regarding each loan transaction investment.

The forms outline the documents, instruments, and instructions that the lender will request the plan trustee(s) to execute, as well as the documents that the plan trustee(s) will be asked to approve for use.

The forms include the following:

Checklist underwriting guidelines approved by the plan trustee or plan administrator.

The broker will provide trust deed investment opportunities that generally conform to these guidelines.  However, each trust deed investment opportunity should be individually reviewed by the plan administrator to establish that the loan transaction (trust deed investment described therein) is generally consistent with the plan’s underwriting guidelines and suitable for the plan’s investment objectives.

The broker and the plan administrator will retain copies of the guidelines supplied to the lender.

Plan trustee questionnaire and certification:

This questionnaire is intended to describe the trustee’s background, knowledge, experience, training, and general level of sophistication.  The lender will use this information to determine which investments to submit to the trustee(s).  The trustee(s) will then decide whether independent investment advice from their qualified professionals is required.

Enclosed is the letter with the trust deed investment.

Package:

The form will accompany each proposed loan transaction investment.  Completed trust deed investment packages will be provided for the plan’s review and consideration when proceeding with a plan investment loan transaction.  This sample letter illustrates the type of information, documents, instruments, and disclosures the plan will receive.

Loan serving agreement:

This form describes and establishes the relationship between the plan and the lender to service loan transactions in which the program invests.  The servicing agreements outline the limited authorities delegated to the servicing agent.  It also describes the plan trustee(s), authorities, and responsibilities, and how the lender will act to carry out the plan trustee(s)’ instructions.  When deciding to purchase a proposed loan, this agreement will accompany each trust deed package provided for review of the plan.

Plan direction letter:

The letter from the plan to the lender represents the program’s written authority to proceed with a specific loan transaction.  This letter will accompany each trust deed package for the plan’s review and consideration.

ERISA is a federal Law that governs the actions of employee benefit plans.  The lender recommends that the form, documents, instruments, disclosures, and instructions that the program will be asked to execute or approve by the plan’s legal counsel be reviewed by a lawyer familiar with all applicable federal and state laws.

The Internal Revenue Regulations (I.R.A.s.s) are governed by the Internal Revenue Service (R.S.), which has adopted the same prohibited transaction standard as those applied under ERISA.   Discussions about fiduciary, plan trustees, and prohibited transactions are substantially the same.

ERISA’s expansion of rules (final rule) expandthe definition of s who qualifies as an investment advisor.

Fact Sheet: Retirement Security Rule and Amendments to Class Prohibited Transaction Exemptions for Investment Advice Fiduciaries | U.S. Department of Labor

Labor Department Finalizes Investment Advice Fiduciary Rule Under ERISA | Davis Wright Tremaine

I think interested parties should consult an ERISA attorney or specialist on the complex subject.