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timely deposit of deferrals to 'plan holding account', but not to participant accounts


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In this plan where all the assets are in self-directed brokerage accounts, the deferrals are sent in one check to the financial advisor, who deposits them to a holding account titled in the name of the plan.  A breakdown is sent with the check, and once the check clears (I assume that has to happen first?), the money is moved from the holding account to the participant accounts.

The checks often arrive in approximately five business days... so we're already getting close the the safe harbor timing.  While this may be outdated these days, we might be able to make the argument that this mailing time and waiting for the funds to clear and then +1 day for the split is "reasonable" for this set up.  Mmmmmaybe.  But what about the times where there is a delay at the financial institution?  The money has been segregated from the employer and is deposited to the plan - check.  So it's not really late to the plan.  Where's the exposure that it didn't get to the participant's account timely... because I assume there has to be some, right?  This happened a couple of times last year, so I want to warn them about this, and being able to hang my hat on something would be nice, but all I'm finding is "must be deposited to the plan", which it was.

I know, get them to a product platform.  Maybe one day. LOL Thanks.

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Beyond merely avoiding a nonexempt prohibited transaction, an ERISA-governed plan’s fiduciary must discharge its duties and obligations prudently.  ERISA § 404(a)(1), 29 U.S.C. § 1104(a)(1).

Would a person who acts with the care, skill, prudence, and diligence that would be used by a fiduciary who is experienced in administering a similar retirement plan find this arrangement prudent?

One can imagine ways it might be imprudent, especially if more efficient services are available at a reasonable expense and without interfering with the plan’s exclusive purpose.

But even if the arrangement might be imprudent:

Is a currently-employed participant ready to sue one’s employer?

Or is a former employee ready to sue for what happened in recent years?

How many ERISA-competent plaintiffs’ attorneys are ready (facing real uncertainty about whether a Federal judge in her discretion would award attorneys’ fees) to sue a small business and its owner?

In other ways, there might be a pressure point about whether the “financial advisor” met and meets its fiduciary responsibilities, not only under ERISA but also under Federal and State banking, insurance, and securities laws.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I'd say it's not a late deposit issue if the money gets into the plan within the safe harbor period.  It's out of the employer's account so there is not a prohibited transaction. 

It's a following-the-terms-of-the-plan issue. If it says money is self-directed and there is this built in delay, is that a problem?  It's not ideal, but honestly, I don't think it's a big deal.  Unfortunately you don't know for sure if/when the DOL is going to want to harass you about it, and when they get up in your grill you've lost whether they are right or not.  I'd probably say all of that to the client and they will hear "it's ok" and keep doing what they are doing.

 

Ed Snyder

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In my prior life, I saw a situation where an investment broker was treated as a functional fiduciary because there was an undue delay in depositing funds to participant accounts. I really don't recall the details on how long the "delay" was - amount was small, and the DOL fined the investment broker a small amount. But this was probably 25 years ago, and I expect enforcement procedures (if any) for such a situation may have changed. 

And I agree with Peter, or at least what I think Peter is saying - If I'm the plan fiduciary, am I acting prudently if I approve such a situation, particularly if the delay is more than a "one time" mistake? The way things are these days, it would make me nervous!

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Agree that if it's in the plan it's not a late deposit issue. But it is then a fiduciary issue. Not sure that's necessarily on the broker/advisor. Sounds like they've gotten bad checks from the employer before and this is their answer. I think that's defensible.

But that makes it an employer/owner fiduciary issue.

William C. Presson, ERPA, APA, QPA, QKA, APR
bill.presson@gmail.com
C 205.994.4070
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Beyond ERISA, if the advisor has possession of or control, even nondiscretionary control, over another person’s money, this might be unlawful or a violation:

if the advisor is not a licensed bank or trust company;

if the arrangement is contrary to the advisor’s securities broker-dealer’s procedures;

if the advisor is an SEC-registered investment adviser and its custody is not sufficiently disclosed to the SEC and its client, and, for anything not held by a regulated bank or SEC-registered broker-dealer, surprise-audited by an independent public accountant.

See, for example:

7 Pa. Stat. §§ 105, 106

https://govt.westlaw.com/pac/Document/N0F685EF06BE411E2B54299305CE1E81B?viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default)

https://govt.westlaw.com/pac/Document/NDECBA6206BE411E28981FA740B828C88?viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default)

17 C.F.R. § 275.206(4)-2 https://ecfr.federalregister.gov/current/title-17/chapter-II/part-275/section-275.206(4)-2

Further, the employer and responsible plan fiduciary might want its lawyer’s advice about whether it would be liable for an uninsured theft loss.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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3 hours ago, RatherBeGolfing said:

That is even more troubling... Where did the employees funds go if the check bounces?

I'm sure the employer replaced it within a "short" time. But I've known of a client that had this issue and the advisor did something relatively similar. Because the BD wasn't going to risk having to "float" a loan for the money if it bounced. So deposit and wait for it to clear and then buy the investments.

William C. Presson, ERPA, APA, QPA, QKA, APR
bill.presson@gmail.com
C 205.994.4070
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