moving money out of a plan

[Santo Gold]

An employer has a 401k plan in place right not. They want to change investments and will do so. However, some of the employees do not want their existing money to go to the new investment platform. The employer would like to give them the option of taking their money out of the plan or moving it to the new investments. Because there is not a distributable event, this will not work.

So another option that was presented was to start a second 401k plan. Terminate the first plan, start the second plan with identical provisions to the first plan. Now there is a distributable event so the participants can roll their money into the second plan or take it in cash or roll to an IRA. Thats what they want, but I know this won't work, just not sure why. Anything I can point to prove this won't work?

Another option that I'm not sure about. What if they freeze instead of terminate the first plan, and start the second plan. but the second plan is written to not allow for transfers into it. Does that open up options on what to do with the money in the first plan?

Thanks for any comments

[Kevin C]

None of those options will work. Plan termination is not a distributable event if there is an alternative defined contribution plan maintained by the employer.

1.401(k)-1(d)(4) Rules applicable to distributions upon plan termination

(i) No alternative defined contribution plan. --A distribution may not be made under paragraph (d)(1)(iii) of this section if the employer establishes or maintains an alternative defined contribution plan. For purposes of the preceding sentence, the definition of the term "employer" contained in §1.401(k)-6 is applied as of the date of plan termination, and a plan is an alternative defined contribution plan only if it is a defined contribution plan that exists at any time during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees who were eligible under the defined contribution plan that includes the cash or deferred arrangement as of the date of plan termination are eligible under the other defined contribution plan, the other plan is not an alternative defined contribution plan. In addition, a defined contribution plan is not treated as an alternative defined contribution plan if it is an employee stock ownership plan as defined in section 4975(e)(7) or 409(a), a simplified employee pension as defined in section 408(k), a SIMPLE IRA plan as defined in section 408(p), a plan or contract that satisfies the requirements of section 403(b), or a plan that is described in section 457(b) or (f).

[rcline46]

The participants do not have a choice. Only the trustees of the plan have the choice of where to invest the assets, as long as the investments are prudent.

Individual investement direction is not a protected benefit.

[jpod]

I am not advocating this because I think the employees' preference for the current investments is a silly reason to perform headstands to try to accomodate them. For what it's worth, however, could you not spin-off the piece of the plan covering those employees and then terminate that spun-off plan (and not allow those employees to participate in the oritinal plan or any successor plan)?

[Bill Presson]

An employer has a 401k plan in place right not. They want to change investments and will do so. However, some of the employees do not want their existing money to go to the new investment platform.

Thanks for any comments

What about some kind of brokerage window that would enable the participants to choose the funds they love?

[Kevin C]

jpod, I don't see that working, either. The only exception to being an alternative defined contribution plan that is based on eligibility has a 24 month window, 12 months before and 12 months after the termination date. These people are eligible under the current plan, so the current plan would be an alternative defined contribution plan with regard to the spun-off plan.

If you want to do headstands, cartwheels and other gymnastic maneuvers to accomodate these employees, think SEP or SIMPLE IRA for everyone. Then, you can have a different employee group mad at you.

[Santo Gold]

If the employer froze the first plan (no more contributions allowed into Plan #1), started the second plan, and then 12 months go by, could the participants in plan #1, after 12 months, then take their money out as a distribution?

[Guest dms9999]

If the employer froze the first plan (no more contributions allowed into Plan #1), started the second plan, and then 12 months go by, could the participants in plan #1, after 12 months, then take their money out as a distribution?

No. The 12 month period ends after distribution of all plan assets.