profit sharing plan investment

[Gary]

A one participant/owner implements his own profit sharing plan.

No other employees.

His plan has say 100k in assets.

The owner wants to invest in art work with some of the plan assets.

As far as I know this is an allowable investment. Does anyone know for certain that such an investment is permissible? Or knowotherwise?

Thanks.

[austin3515]

If he is buying it for display in his living room, it would be prohibitted transaction. Definitely a gray area. If it was on display in a museum, then probably it would be OK.

[movedon]

What Austin said, plus there are practical reasons not to put illiquid and difficult to value assets in a plan. There are other fiduciary and discrimination pitfalls that would only apply if there were employees and the plan was subject to ERISA.

[Guest Sieve]

Since it's a one-participant plan, I would argue that its investments are, by definition, individually-directed. If so, then it is a per-se distributable event to invest in art work. (IRC Section 408(m).)

I would stay away from such an investment for that reason.

[Belgarath]

I'd argue that that's on overly expansive interpretation of the law. Granted that the participant and Trustee may be one and the same person, the plan document will still grant or restrict specific rights and duties, and there is in fact a division where the person is acting separately as a participant and as a fiduciary. If the plan document does not provide for participant direction of investments, then I think it is permissible to invest in artwork, SUBJECT OF COURSE to the fiduciary being able to prove that in excercising his fiduciary capacity, that it is prudent, etc., etc...

Mind you, I'm not an attorney, so I wouldn't advise either way. I'd tell them to talk to their attorney, and if that were you, you'd advise them not to, and we'd both be happy!

[Guest Sieve]

Of course, as lippy points out, ERISA is not an issue for a one-participant plan, so DOL presumably has no power to enforce ERISA's fiduciary provisions--until a non-owner becomes a participant.

But, my conservative twin still would advise against such an investment.

[Gary]

Great answers. I presume the self directed issue does not arise if it is a defined benefit plan? However, it seems a self dealing PT arises unless it is a true investment at a museum.

In the case of a Db plan where participant has reached normal retirement age it seems it would be prudent to just treat it as a distribution.

Any thoughts?

PS DB board was silent on this matter thus the reason for me to roam over to 401k board.

thanks

[My 2 cents]

If the sole participant happened to die, would the beneficiary, when told that "while the plan is supposed to pay you a $100k lump sum but all the plan has is this velvet painting of poker-playing dogs so here it is", be able to sue the decedent's estate for the participant's violation of fiduciary standards in connection with the imprudent investment? Are one-person plans subject to the usual fiduciary standards?

I recall from a few decades ago that one may not invest one's IRA assets in collectibles. Rules may have changed since then, but in any event, using plan assets to buy something one covets as an "investment" would, at the least, be skating pretty close to the edge.