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Prohibited Transaction-son of trustee as investment advisor on 401(k) plan


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Father is a trustee on a corporate 401(k) plan.  Son (over age 18) is an investment advisor and is interested in being the investment advisor for the plan.  As the son would be a party in interest, would this be a prohibited transaction?  Is there prohibited transaction exemption for this situation? Thanks for any help you can give.

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While I advise no one, a fiduciary might want his, her, or its lawyer’s advice to consider these and related points:

If the only tension were that an investment adviser gets compensation for its services, ERISA § 408(b)(2) might exempt that prohibited transaction.

But if a service arrangement involves a fiduciary’s self-dealing, the self-dealing act is a separate prohibited transaction. 29 C.F.R. § 2550.408b-2(e)(1); accord 29 C.F.R. § 2550.408b-2(f) example 6 (about father and son).

“Thus, a fiduciary may not use the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such fiduciary (or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary) to provide a service.” 29 C.F.R. § 2550.408b-2(e)(1) (emphasis added).

A fiduciary’s recusal might not get rid of the conflict unless none of the remaining fiduciaries has any personal interest in pleasing the father or otherwise to select the son.

https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.408b-2

If the plan’s fiduciaries (preferably those other than the father) sincerely believe that the son might be the investment adviser that would be selected on the merits, those fiduciaries might engage an independent fiduciary to evaluate investment-adviser candidates and select the plan’s investment adviser.

Yet, a fiduciary would do so only if the plan’s expense for the independent fiduciary’s service would be no more than a prudently incurred expense needed to serve the plan’s exclusive purpose.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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