What Is PTE 77-3 for a 401(k) Plan?

PTE 77-3 is the exemption that lets a mutual fund complex use its own open-end mutual funds inside its own employee benefit plan without automatically violating ERISA's prohibited-transaction rules. The exemption is narrow. It does not say proprietary funds are prudent, low cost or preferred. It says the acquisition or sale can receive specified prohibited-transaction relief when the plan fits the in-house definition and four conditions are satisfied.^[1][2]

That distinction matters because the conflict is obvious.

A mutual fund company, investment adviser or affiliated financial firm can sponsor a 401(k) for its employees.

The same corporate organization can also earn money when those employees' retirement assets are invested in affiliated mutual funds.

ERISA does not ignore the conflict because the arrangement is common.

PTE 77-3 gives it a defined legal route.

Why Does an In-House Mutual Fund Need an Exemption?

Assume an asset-management company sponsors a 401(k).

The plan offers:

• proprietary U.S. equity fund
• proprietary bond fund
• proprietary target-date funds
• proprietary money market fund.

Every dollar directed into those funds increases assets managed by the employer's fund complex.

The mutual funds pay advisory and other permitted fund expenses to affiliated firms.

That can create transactions involving:

• parties in interest
• fiduciary self-interest
• compensation connected to plan assets
• employer-related securities.

ERISA Sections 406 and 407(a) are designed to address precisely those kinds of insider relationships.^[10]

PTE 77-3 provides relief for the defined acquisition or sale.

Without the exemption or another source of relief, a technically ordinary fund purchase can create a prohibited-transaction problem.

PTE 77-3 Is an In-House Plan Exemption

The current Department of Labor class-exemption list describes PTE 1977-03 as permitting purchases and sales of open-end mutual fund shares by a plan that covers only employees of:

• a mutual fund
• its investment adviser
• its principal underwriter
• an affiliate.^[1]

The employee relationship is not incidental.

It defines the exemption.

PTE 77-3 is not the rule for every plan whose recordkeeper happens to offer proprietary funds.

It is designed for the fund complex's own workforce.

"Only Employees" Is a Real Scope Limitation

The original exemption applies to an employee benefit plan covering only employees of the relevant investment company, investment adviser, principal underwriter or qualifying affiliated persons.^[2][3][4]

That means the first question is not:

Are these good mutual funds?

It is:

Is this the kind of in-house plan PTE 77-3 covers?

A plan sponsored by an unrelated manufacturer that uses a large asset manager's proprietary funds does not become a PTE 77-3 plan.

That fact pattern belongs in another exemption analysis.

INV-155 explains the most obvious neighboring route: PTE 77-4.

PTE 77-3 Uses an Investment Company Act Affiliate Concept

The exemption refers to affiliated persons using the Investment Company Act framework.^[2][3][12]

That matters because:

affiliate

is not one universal ERISA concept.

The Investment Company Act's affiliated-person definition can reach specified ownership, control and relationship structures.^[12]

A compliance memo should therefore identify:

• plan sponsor
• mutual fund
• fund adviser
• principal underwriter
• parent company
• subsidiaries
• ownership relationships
• control relationships.

Do not substitute a corporate organization chart label for the exemption's actual definition.

A Bank's In-House Plan Can Fit

DOL Advisory Opinion 1984-08A addressed the Marine Midland Thrift Incentive Plan.

The plan covered employees of Marine Midland Banks and specified subsidiaries.

The participating employers were represented to be affiliated persons of the bank within the Investment Company Act definition.

The proposal would allow participants to direct plan assets into portfolios of a registered open-end mutual fund for which the bank provided advisory and other services.^[3]

That is a useful example because the sponsoring organization was a:

banking group

rather than a company whose only business was operating mutual funds.

The relevant question was the statutory and exemption relationship.

Not the branding.

PTE 77-3 Can Apply Whether or Not the Fund Parties Are Fiduciaries

The exemption's structure is broader than:

fund adviser is definitely a plan fiduciary.

DOL's descriptions of PTE 77-3 state that the relief applies to the covered acquisition or sale when the conditions are met, whether or not the investment company, adviser, principal underwriter or affiliated person is itself a fiduciary with respect to the plan.^[2][3]

That is another difference from PTE 77-4.

PTE 77-4 is built around a plan fiduciary who is also the affiliated fund adviser or related person.

PTE 77-3 starts with the in-house employee relationship.

The Four Conditions Are the Core of the Exemption

PTE 77-3 has four principal conditions.^[2][7][8]

Condition 1: no separate prohibited advisory-fee layer

The plan generally cannot pay an investment management, investment advisory or similar fee to the investment adviser, principal underwriter or affiliated person.

The condition does not prohibit the mutual fund itself from paying its normal investment advisory fee under a properly adopted advisory agreement.^[2][3]

Condition 2: redemption fee only under narrow terms

The plan cannot pay a redemption fee on a covered sale back to the fund unless:

• the fee is paid only to the investment company
• the fee's existence is disclosed in the prospectus in effect when the shares were acquired
• the fee is also disclosed in the prospectus in effect when the shares are sold.^[2]

Condition 3: no sales commission

For the operative prospective framework, the plan cannot pay a sales commission in connection with the covered acquisition or sale.^[2]

Condition 4: no less-favorable dealings

All other dealings between the plan and the investment company, adviser, principal underwriter or relevant affiliates must be:

on a basis no less favorable to the plan

than dealings with other shareholders of the investment company.^[2]

The fourth condition carries much of the modern litigation risk.

The First Fee Condition Is Not "No Fund Expenses"

A mutual fund has an expense ratio.

That expense ratio can include the fund's:

• advisory fee
• administration
• custody
• transfer agency
• accounting
• other fund expenses.

PTE 77-3 does not say an in-house plan must receive mutual-fund management for free.

It distinguishes between:

the fund paying its advisory fee

and:

the plan separately paying the related adviser or affiliate another investment management, investment advisory or similar fee.^[2][3]

The exemption was designed to prevent the plan from bearing an improper additional advisory layer while still allowing the ordinary economics of a mutual fund.

Example: Fund-Level Fee Is Not Automatically a Second Plan Fee

Assume proprietary fund expense ratio:

0.35%.

Included investment advisory fee:

0.20%.

The mutual fund pays that advisory fee to the affiliated adviser under its Investment Company Act advisory agreement.

The employee plan does not separately pay that adviser a second asset-management fee for the same assets.

That structure is materially different from:

• 0.35% fund expense ratio
• plus 0.25% separate investment-management charge paid by the plan to the same affiliate.

The second arrangement raises the exact duplication concern PTE 77-3's first condition is designed to prevent.

"Similar Fee" Prevents Easy Relabeling

The exemption does not stop at the phrase:

investment advisory fee.

It also refers to investment management or similar fees.^[2]

That language matters.

A conflicted provider should not be able to avoid the condition by changing the invoice from:

investment advisory

to:

portfolio oversight

if the underlying service is substantively the same.

Fee classification should follow:

• function
• compensation recipient
• basis of calculation
• relationship to plan assets.

Not the billing label.

Redemption Fees Have a Specific Exception

The redemption-fee condition is not an absolute ban.

A qualifying fee can fit when:

1. it is paid only to the mutual fund
2. the fee was disclosed in the relevant prospectus when the plan acquired the shares
3. it remains disclosed when the shares are sold.^[2]

The structure matters because a redemption fee retained by the fund can serve a different purpose from a fee paid to the sponsor or affiliate as transaction compensation.

The exemption still requires the stated conditions.

Example: Permitted vs. Problematic Redemption Fee

Structure A

Plan redeems fund shares.

Fund charges:

1% short-term redemption fee.

Fee stays in the fund.

Prospectus disclosed the fee at acquisition and redemption.

That can fit the redemption-fee condition.

Structure B

Plan redeems shares.

A sponsor affiliate receives:

1% exit fee.

That is not the same economic arrangement.

PTE 77-3's limited redemption-fee language is not a general permission for affiliated exit charges.

The Sales-Commission Rule Looks Simple Until Distribution Economics Appear

Condition (c) says the plan cannot pay a sales commission in connection with the covered acquisition or sale.^[2]

Traditional front-end loads make the issue obvious.

Modern fund distribution can be less transparent.

Compensation can appear through:

• Rule 12b-1 fees
• distribution fees
• broker compensation
• platform payments
• servicing arrangements.

The word on the fund fact sheet is not enough.

Who receives the money matters.

DOL Addressed 12b-1 Fees in Advisory Opinion 2006-06A

The 2006 opinion involved a proprietary mutual fund whose distributor received Rule 12b-1 fees and paid them to an:

unrelated broker.^[5]

The represented facts were unusually clean:

• the broker was unaffiliated with the fund
• unaffiliated with the distributor
• unaffiliated with the advisers
• unaffiliated with plan fiduciaries
• the distributor retained none of the 12b-1 fee
• no plan fiduciary or affiliate received the fee.^[5]

DOL concluded that, under those facts, the 12b-1 fee paid to the unrelated broker would not be treated as the sales commission prohibited by PTE 77-3(c).^[5]

That is useful guidance.

It is not a blank check.

The Recipient Is the First 12b-1 Question

Compare two arrangements.

Arrangement A

Fund collects 0.25% 12b-1 fee.

Entire amount goes to unrelated Broker X.

Fund distributor keeps:

$0.

No plan fiduciary or affiliate receives any part.

That resembles the facts DOL addressed in 2006-06A.

Arrangement B

Same 0.25% fee.

Affiliated distributor keeps:

0.15%.

Related broker receives:

0.10%.

Now the economics are completely different.

Do not cite 2006-06A as though the recipient did not matter.

The opinion was built around the lack of affiliated retention.

PTE 77-3 Does Not Require PTE 77-4's Independent Second Fiduciary

This is the sharpest structural difference between INV-155 and INV-156.

PTE 77-4 requires an independent and unrelated second fiduciary to receive detailed information and approve the affiliated-fund arrangement.

PTE 77-3 does not contain that same approval architecture.^[2]

Its protections instead include:

• narrow in-house plan eligibility
• no separate prohibited advisory fee
• redemption-fee limits
• no sales commission
• no less-favorable treatment than other shareholders.

That does not make PTE 77-3 weaker in every respect.

It means the exemptions solve different fact patterns with different controls.

Why Would an In-House Plan Have a Different Structure?

The exemption reflects the practical reality that a mutual fund company or investment adviser may naturally use its own products for its own employee plan.

A bank normally does not need to deposit its employee plan's cash at a competitor solely to avoid affiliation.

An insurance company does not necessarily need to buy another carrier's products for its own employees.

The same logic supported the historical development of in-house investment exemptions.^[1]

But ordinary business practice is not enough.

PTE 77-3 conditions the relationship so the employer cannot use the employee plan as captive capital on economically inferior terms.

The Fourth Condition Is the Real Economic Test

Condition (d) is easy to quote:

no less favorable than other shareholders.

Applying it is harder.

A mutual fund can have:

• several share classes
• different expense ratios
• revenue-sharing arrangements
• recordkeeping credits
• fee waivers
• institutional pricing
• distribution arrangements
• administrative rebates.

A plan can therefore pay the same stated price for the same underlying portfolio while receiving worse:

net economics.

That is why condition (d) has generated substantial litigation.

Equal NAV Does Not Necessarily Mean Equal Treatment

Mutual fund shares are generally purchased and redeemed at net asset value, adjusted as applicable under the fund's structure.

Suppose:

• Plan A buys proprietary fund shares at NAV
• Outside Plan B buys shares of the same fund at NAV.

That does not end the comparison.

Outside Plan B may also receive:

• 15 basis points of recordkeeping credit
• access to a lower-cost share class
• a fee waiver
• another economic benefit linked to its investment.

PTE 77-3(d) asks about:

all other dealings.

The comparison can be broader than the transaction price alone.^[6][9]

Brotherston Made Revenue Sharing Hard to Ignore

In *Brotherston v. Putnam Investments*, the First Circuit addressed PTE 77-3(d) in litigation involving Putnam's own plan.^[6]

Outside plan shareholders received revenue-sharing payments that could offset recordkeeping costs.

Putnam argued those payments were made to third-party service providers rather than directly to the outside plans.

The court rejected the idea that this automatically made the payments irrelevant.

If the payment benefits the outside plan by reducing an expense it otherwise would bear, it can matter to the no-less-favorable analysis.^[6]

That is an economically sensible reading.

A $100 benefit does not stop being valuable because the check is sent to the plan's vendor.

Employer Contributions Are a Different Hat

Putnam also pointed to discretionary employer contributions it made to its own employees' accounts.

Those contributions could exceed the revenue-sharing benefits given to outside plans.

The First Circuit did not treat that as the right offset.^[6]

Why?

Because the employer was acting in a different capacity.

An ERISA sponsor can wear more than one hat:

• employer
• settlor
• fiduciary
• service provider
• investment manager.

Compensation paid as employer is not automatically a favorable:

fund dealing

that cures less favorable treatment in the fiduciary relationship.

Net Economics Still Matter

Brotherston did not establish a simplistic rule that:

any rebate to another shareholder = automatic PTE failure.

The court remanded for analysis of whether the in-house plan was treated less favorably on a meaningful net basis.^[6]

That distinction matters.

Suppose outside Plan B receives:

0.10% recordkeeping credit

but pays:

0.20% higher fund expenses

than the in-house plan.

The answer is not obvious from one line item.

A serious comparison should reconcile:

• expense ratio
• share class
• credits
• rebates
• waivers
• administrative support
• relevant shareholder-specific benefits.

A Share-Class Delay Can Create a PTE Problem

Assume an affiliated fund launches a lower-cost institutional share class.

Existing class:

0.45%.

New class:

0.30%.

Comparable outside retirement plans move into the 0.30% class.

The employer's in-house plan stays in 0.45% shares for another year.

Annual excess cost on:

$300 million

is:

0.15% × $300 million = $450,000.

The fact that every investor still in the 0.45% class pays 0.45% does not necessarily answer the PTE 77-3(d) issue.

Courts have treated access to lower-cost share classes as potentially relevant to whether the in-house plan was treated less favorably.^[7][8]

Wildman Rejected a Per-Share-Class Shortcut

In *Wildman v. American Century Services*, the district court addressed an argument that each share class should be treated as a separate security for PTE 77-3 comparison purposes.^[7]

The dispute involved a delay in converting the in-house plan to lower-cost R6 shares while other employer-sponsored plans could access them.

The court rejected the proposed per-share-class limitation in that case and found PTE 77-3 did not shield the challenged delay.^[7]

That does not create a universal national formula for every share-class dispute.

It makes one point hard to defend:

we treated everyone in the expensive class equally

can be too narrow when the real issue is why the in-house plan remained in that class.

"Lowest Cost" Is Not the Entire PTE 77-3 Test Either

The opposite shortcut is also weak:

If the in-house plan did not receive the lowest expense ratio, PTE 77-3 automatically fails.

The exemption says:

all other dealings

must be no less favorable.^[2]

The comparison can involve more than one economic term.

A plan can conceivably use a share class with a higher headline expense ratio but receive other contractual credits or services that change net economics.

That is why a clean analysis uses a reconciliation.

Not a single fee column.

ROIStreet No-Less-Favorable Reconciliation

A practical PTE 77-3 review can use six lines.

The arithmetic does not itself decide the legal question.

It reveals where the question is.

Comparable Shareholder Does Not Mean Every Similar Investment Product

PTE 77-3(d) refers to other shareholders of the:

investment company.^[2]

That matters when plaintiffs or committees compare:

• mutual fund
• separate account
• CIT
• another fund with similar strategy.

A lower-cost CIT managed by the same firm may be highly relevant to ordinary ERISA prudence.

It does not automatically become the PTE 77-3(d) comparator because a CIT investor is not necessarily another shareholder of the same investment company.

Courts have recognized this distinction.^[8][9]

Keep two analyses separate:

PTE 77-3 parity

How was the in-house plan treated relative to relevant shareholders of the investment company?

Section 404 prudence

Was the proprietary mutual fund itself a prudent choice compared with reasonable alternatives, including CITs or other vehicles?

Those questions can produce different answers.

An Exempt Fund Can Still Be More Expensive Than a Better Alternative

Suppose PTE 77-3 is fully satisfied.

The in-house plan receives:

• cheapest proprietary share class
• same credits as comparable shareholders
• no sales commission
• no improper plan-level advisory fee.

The proprietary fund still charges:

0.42%.

A comparable institutional index CIT costs:

0.05%.

PTE 77-3 may solve the prohibited-transaction issue.

It does not decide whether choosing the 0.42% proprietary fund was prudent under ERISA Section 404.^[11]

The committee still has to justify the investment.

PTE Relief and Fiduciary Prudence Are Different Layers

ERISA Section 404 requires fiduciaries to act:

• prudently
• loyally
• for the proper purpose
• in accordance with governing plan documents where consistent with ERISA.^[11]

PTE 77-3 does not erase those duties.

DOL made the point directly in Advisory Opinion 1998-06A when discussing an in-kind conversion.

Even if the proprietary-fund acquisition receives exemption relief, a fiduciary can still violate Section 404 if the decision is motivated by the sponsor's desire to:

seed or support its own mutual fund

rather than participants' interests.^[4]

That is the right conceptual boundary.

Proprietary Fund Selection Needs a Business-Interest Check

For every affiliated fund, ask:

Would we select this investment if it were managed by an unrelated firm?

That question is not legally dispositive.

It is operationally powerful.

A weak file often contains:

• strong description of the fund
• strong description of the employer
• no serious alternatives
• no reason for selecting the proprietary vehicle.

A better file includes:

• strategy fit
• benchmark
• performance
• fees
• risk
• capacity
• operational quality
• comparable nonproprietary alternatives
• conflicts
• participant impact.

PTE 77-3 permits the relationship.

It does not justify it.

Participant Direction Does Not End the Analysis

The Marine Midland facts in Advisory Opinion 1984-08A involved participant direction among investment options.^[3]

That does not mean:

participant clicked the fund, therefore fiduciary conflict disappears.

A plan fiduciary still decides matters such as:

• whether the fund appears on the menu
• which share class is used
• what fees the plan pays
• whether credits are retained or returned
• how the option is monitored.

Participant choice occurs inside a menu somebody designed.

PTE 77-3 and Section 404 still matter to that design.

Example: Participant Chooses the Affiliated Fund

Plan offers:

• proprietary equity fund at 0.55%
• unaffiliated equity index fund at 0.04%.

Participant selects proprietary fund.

That participant decision does not answer:

• whether 0.55% was the right proprietary share class
• whether outside shareholders got rebates the in-house plan did not
• whether affiliated fees complied with PTE 77-3
• whether the committee prudently retained the fund.

The participant owns the allocation decision.

The fiduciary can still own the menu decision.

In-Kind Exchanges Can Fit the Word "Acquisition"

Advisory Opinion 1998-06A addressed a bank's in-house plan investing in proprietary mutual funds through an:

in-kind exchange.^[4]

Instead of selling collective investment fund assets for cash and then buying mutual fund shares, securities could be transferred to the mutual fund in exchange for its shares.

DOL concluded that PTE 77-3 relief could extend beyond a cash purchase to the acquisition of fund shares through that exchange, assuming the exemption's conditions were satisfied.^[4]

That is a useful interpretation of:

acquisition.

But the opinion drew an important line.

PTE 77-3 Does Not Exempt Every Step of a CIF Conversion

A conversion can contain several transactions:

1. collective investment fund holds securities
2. plan interests in CIF are changed or withdrawn
3. securities are transferred
4. mutual fund receives securities
5. plan receives mutual fund shares.

PTE 77-3 concerns the acquisition or sale of the proprietary mutual-fund shares.

DOL said the exemption did not automatically provide relief for prohibited transactions arising from:

• terminating the CIF
• permitting certain plans to withdraw
• transferring plan assets held by the CIF.^[4]

Those steps can require separate analysis.

This is the same principle seen throughout prohibited-transaction law:

one exemption does not necessarily cover the entire transaction chain.

Valuation Matters in an In-Kind Exchange

In the 1998 opinion, outside client plans participating in a related conversion were subject to PTE 97-41.

DOL said the no-less-favorable condition of PTE 77-3 required the in-house plan's valuation methodology to be consistent with the methodology used for the outside plans in the circumstances described.^[4]

That is economically important.

If an in-house plan contributes securities worth:

$10 million

but receives only:

$9.8 million

of fund shares because the affiliated valuation methodology disadvantages it, the conflict is not cured by calling the transfer:

in kind.

Parity has to survive the mechanics.

Seed-Capital Motivation Is a Red Flag

Imagine an affiliated fund has:

$15 million

of assets and poor commercial traction.

Employer's 401(k) has:

$1.5 billion.

Committee moves:

$200 million

of participant assets into the affiliated fund.

The fund immediately becomes easier to market to outside investors because:

• AUM is larger
• fixed expenses spread over more assets
• operating scale improves
• track record looks institutionally established.

The plan may also receive a technically compliant purchase price.

That does not answer loyalty.

If the real reason for the transaction was to improve the sponsor's product economics, Section 404 remains a problem.^[4][11]

PTE 77-3 Does Not Protect a Bad Investment Process

A compliance file should not stop at:

PTE 77-3 checklist completed.

It should have two sections.

Exemption file

• in-house plan eligibility
• registered open-end fund
• affiliated-person analysis
• no separate prohibited advisory fee
• redemption fee compliance
• no sales commission
• no-less-favorable comparison.

Fiduciary file

• investment thesis
• alternatives
• cost
• performance
• risk
• share-class selection
• conflicts
• monitoring
• decision rationale.

If only the first file exists, the sponsor has solved the wrong half of the problem.

PTE 77-3 vs. PTE 77-4

The exemptions are adjacent.

They are not substitutes.

A Sponsor Cannot Choose PTE 77-3 Because It Has Fewer Approval Steps

Suppose outside corporate client Plan X hires Asset Manager A as fiduciary.

A recommends its own mutual funds.

The manager cannot say:

PTE 77-3 has no independent second-fiduciary requirement, so we will rely on that one.

Plan X does not cover only employees of the fund complex.

The exemption scope fails before the conditions matter.

PTE selection follows the facts.

Not administrative convenience.

The Current DOL List Still Identifies PTE 1977-03

DOL's current class-exemption page lists:

Open-End Mutual Funds In-House Plans, PTE 1977-03

with:

• Application No. D-025
• Final Exemption: 42 FR 18734
• Proposed Exemption: 41 FR 54080.^[1]

The description remains the same core concept:

purchase and sale of open-end mutual fund shares by a plan covering only employees of the fund, adviser, principal underwriter or affiliate.^[1]

That is the operative starting point in 2026.

The 2024 Mass Amendment Did Not Reach PTE 77-3

DOL's 2024 Retirement Security rulemaking amended a specific list of existing exemptions:

• PTE 75-1
• PTE 77-4
• PTE 80-83
• PTE 83-1
• PTE 86-128.^[1]

That list omitted PTE 77-3.

The 2024 rule and associated amendments were later vacated, with DOL publishing notice of vacatur in March 2026.

That history materially affects INV-155's PTE 77-4 discussion.

Because PTE 77-3 sat outside that amendment package, its later vacatur did not create a 2026 restoration event for the exemption.

Do Not Import Vacated PTE 77-4 History Into PTE 77-3

The two exemptions were issued on the same date in 1977.

That makes it tempting to treat their later histories as identical.

They are not.

PTE 77-4 was amended in later fiduciary-advice rulemakings.

The 2024 mass-amendment list excluded PTE 77-3.^[1]

A current compliance summary should therefore avoid language like:

"PTE 77-3 reverted to its pre-2024 version in 2026."

The cleaner statement is:

PTE 77-3 continues to operate under its longstanding 1977 framework; the 2024 mass amendment and 2026 vacatur concerned other listed exemptions, including PTE 77-4, not PTE 77-3.

Four Conditions, One Decision System

The exemption is short enough to tempt checklist compliance.

The better approach is to connect the four conditions.

Fee layer

Is the plan separately paying affiliated investment management, advisory or similar compensation?

Exit charge

Could a redemption fee transfer value to an affiliate rather than remaining with the fund under disclosed terms?

Distribution

Is the plan paying a sales commission or a fee functioning as conflicted sales compensation?

Parity

Does the in-house plan receive economics no worse than relevant other fund shareholders?

Those questions describe one underlying concern:

Is the employer using its captive employee plan to generate affiliated revenue on terms it would not impose on outside shareholders?

A Practical PTE 77-3 Review Test

Identify the in-house plan → identify every employer whose employees participate → map the mutual fund, adviser, principal underwriter and affiliated persons → confirm the investment is a registered open-end investment company → confirm the plan fits the employee-only scope → identify every direct and indirect fee connected to the investment → isolate any plan-level investment management, advisory or similar fee paid to the adviser, underwriter or affiliate → confirm any fund-level advisory fee arises under the fund's proper advisory agreement → identify redemption fees and confirm fund-only payment plus prospectus disclosure → identify all sales commissions and distribution compensation → for 12b-1 arrangements, identify the ultimate recipient and any affiliated retention → compare share classes available to relevant other fund shareholders → compare expense ratios → identify revenue-sharing payments, recordkeeping credits, rebates, waivers and other shareholder benefits → calculate net economics rather than headline fees alone → document why any differences do not leave the in-house plan worse off → if an in-kind exchange is used, separate the proprietary-fund acquisition from CIF termination, withdrawal and transfer steps → test valuation parity → document the independent Section 404 investment case → monitor both exemption compliance and investment prudence over time

The useful question is not:

"Are proprietary funds allowed?"

It is:

"Does this plan fit the in-house exemption, are all four conditions satisfied in actual dollars and relationships, and would the fiduciaries still select and retain these funds if the employer did not profit from them?"

That is the PTE 77-3 decision.

Frequently Asked Questions

What is PTE 77-3?

PTE 77-3 is a Department of Labor class exemption for specified acquisitions and sales of shares of registered open-end mutual funds by employee benefit plans covering only employees of the fund complex, adviser, principal underwriter or qualifying affiliates, when the exemption's conditions are satisfied.^[1][2]

Is PTE 77-3 only for 401(k) plans?

No. The exemption refers to employee benefit plans fitting its stated scope. A 401(k) is a common modern application, but the legal text is not limited to plans labeled 401(k).

Does PTE 77-3 cover any proprietary mutual fund?

No. The plan and fund complex must satisfy the exemption's relationship and transaction conditions.

Does it cover CITs?

Not as PTE 77-3 mutual-fund shares. The exemption is tied to shares of an open-end investment company registered under the Investment Company Act. CITs require different analysis.

Does it cover closed-end funds?

PTE 77-3 is the open-end mutual-fund exemption. DOL separately lists PTE 1979-13 for closed-end mutual-fund in-house plans.^[1]

Can the plan pay the affiliated adviser a separate management fee?

The first condition generally prohibits a separate investment management, investment advisory or similar fee to the adviser, principal underwriter or affiliate in the covered structure, while ordinary advisory fees paid by the mutual fund under its investment advisory agreement can remain.^[2]

Can the fund charge a redemption fee?

Only under the exemption's limited conditions, including payment solely to the fund and required prospectus disclosure.^[2]

Can the plan pay a sales load?

PTE 77-3's operative condition prohibits a sales commission in connection with the covered acquisition or sale.^[2]

Are all 12b-1 fees prohibited?

No. DOL Advisory Opinion 2006-06A concluded that a 12b-1 fee paid entirely to an unrelated broker was not the prohibited sales commission under the specific represented facts.^[5] The opinion should not be generalized to affiliated recipients.

Does PTE 77-3 require an independent second fiduciary?

Not as a core condition. That approval structure belongs to PTE 77-4, not PTE 77-3.

What does "no less favorable" mean?

Other dealings between the in-house plan and the fund complex must be on a basis no less favorable than dealings with other shareholders of the investment company.^[2] Depending on the facts, that can require analysis of share classes, rebates, revenue-sharing credits and other economic benefits.^[6][7][9]

Does using the same share class as another investor prove compliance?

Not necessarily. Courts have examined whether lower-cost share classes or other economic benefits were available to relevant other shareholders.^[7][8]

Can revenue-sharing credits matter?

Yes. The First Circuit in *Brotherston* held that payments benefiting other plan shareholders by offsetting service costs could matter to the PTE 77-3(d) comparison even when paid to third-party service providers.^[6]

Can employer profit-sharing contributions offset worse fund economics?

Not automatically. *Brotherston* distinguished discretionary employer contributions from fiduciary dealings relevant to the PTE comparison.^[6]

Does a cheaper CIT prove PTE 77-3 fails?

Not automatically. The PTE comparator is framed around other shareholders of the investment company. A cheaper CIT can still be highly relevant to Section 404 prudence.

Can an in-kind exchange qualify?

DOL Advisory Opinion 1998-06A concluded that acquisition can include an in-kind exchange of plan securities for proprietary mutual-fund shares under the described facts.^[4]

Does the exemption cover termination of the old collective fund?

Not automatically. DOL distinguished the proprietary-fund acquisition from separate transactions involved in CIF termination, withdrawals and asset transfers.^[4]

If participants direct the investment, is the sponsor protected?

Participant direction does not erase the plan fiduciary's responsibilities for investment-menu construction, share-class selection, fees or monitoring.

Does PTE 77-3 prove the proprietary fund is prudent?

No. ERISA Section 404 remains a separate requirement.^[11]

Was PTE 77-3 changed by the 2024 Retirement Security Rule?

It was not included in DOL's 2024 mass amendment covering PTEs 75-1, 77-4, 80-83, 83-1 and 86-128. The 2026 vacatur of that amendment package therefore does not rewrite PTE 77-3's longstanding four-condition framework.^[1]

Sources & References

1. U.S. Department of Labor — Employee Benefits Security Administration: Class Exemptions — PTE 1977-03 — https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/exemptions/class
2. U.S. Department of Labor / Federal Register: PTE 77-3 — Class Exemption Involving Mutual Fund In-House Plans, 42 FR 18734 (April 8, 1977) — https://www.govinfo.gov/content/pkg/FR-1977-04-08/pdf/FR-1977-04-08.pdf
3. U.S. Department of Labor — Employee Benefits Security Administration: Advisory Opinion 1984-08A — https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1984-08a.pdf
4. U.S. Department of Labor — Employee Benefits Security Administration: Advisory Opinion 1998-06A — https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1998-06a
5. U.S. Department of Labor — Employee Benefits Security Administration: Advisory Opinion 2006-06A — https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2006-06a
6. U.S. Court of Appeals for the First Circuit: Brotherston v. Putnam Investments, LLC, 907 F.3d 17 (2018) — https://law.justia.com/cases/federal/appellate-courts/ca1/17-1711/17-1711-2018-10-15.html
7. U.S. District Court for the Western District of Missouri: Wildman v. American Century Services, LLC — https://www.govinfo.gov/content/pkg/USCOURTS-mowd-4_16-cv-00737/pdf/USCOURTS-mowd-4_16-cv-00737-2.pdf
8. U.S. District Court for the Southern District of New York: Moreno v. Deutsche Bank Americas Holding Corp. — https://law.justia.com/cases/federal/district-courts/new-york/nysdce/1:2015cv09936/451458/249/
9. U.S. District Court for the District of Maryland: Feinberg v. T. Rowe Price Group, Inc. — https://www2.mdd.uscourts.gov/Opinions/Opinions/17-0427%20Feinberg%20Opinion%20re%20MSJ%20FOR%20WEBSITE.pdf
10. Legal Information Institute / U.S. Code: 29 U.S.C. §1106 — Prohibited Transactions — https://www.law.cornell.edu/uscode/text/29/1106
11. Legal Information Institute / U.S. Code: 29 U.S.C. §1104 — Fiduciary Duties — https://www.law.cornell.edu/uscode/text/29/1104
12. Legal Information Institute / U.S. Code: 15 U.S.C. §80a-2 — Investment Company Act Definitions — https://www.law.cornell.edu/uscode/text/15/80a-2

Educational Disclaimer

ROIStreet publishes educational content about retirement-plan fiduciary duties, affiliated mutual funds, prohibited transactions, share classes and ERISA exemptions. This article is not legal, fiduciary, securities, tax, investment or plan-administration advice. PTE 77-3 is fact-specific. Availability depends on the plan's employee population, fund and affiliate relationships, fees, share classes, distribution compensation, redemption terms, shareholder treatment, transaction mechanics and current law. Court decisions interpreting the no-less-favorable condition depend on their records and jurisdictions. An exempt transaction remains subject to separate fiduciary duties, including prudence and loyalty.

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