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It has nothing to do with the son being a party in interest or disqualified person. The rule illustrated by the example would be the same if it was the fiduciary's girlfriend rather than his son. I suppose if you could prove to the DOL or a court that the owner actually hated his brother's guts and only hired him because he was the most qualified you wouldn't have a 406(b)(1) PT, but how likely is that?

And hope the plan allows the plan to use forfeitures to pay expenses instead of having to reallocate the funds.

Hiring the brother - if he will be paid with plan assets - is the poster boy for a self-dealing PT under 406(b)(1). See the following example from the DOL regulations. Example 6. F, a fiduciary of plan P with discretionary authority respecting the management of P, retains S, the son of F, to provide for a fee various kinds of administrative services necessary for the operation of the plan. F has engaged in an act described in section 406(b)(1) of the Act because S is a person in whom F has an interest which may affect the exercise of F's best judgment as a fiduciary. Such act is not exempt under section 408(b)(2) of the Act irrespective of whether the provision of the services by S is exempt.

Assuming that we are talking about a single employer plan, when is the employer not a fiduciary? It is my understanding that even if another entity has been designated as the plan administrator or trustee, the employer has the authority to replace them, usually at will and retains sufficient control to be considered a fiduciary.

If the plan had already been disqualified, the proceeds would probably not be eligible to be rolled over. One suspects that it would be from the employer as a fiduciary of the plan (and the employer would usually be the plan administrator) that damages would be sought, not from the plan itself.

I agree with Belgarath re disqualified person/party in interest for PT purposes. However, I'd be very concerned about possible fiduciary violations unless the owner can prove that using the brother as the plan's investment advisor can clearly be shown to be in the best interests of the employees and other beneficiaries.