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"Bad" doesn't do it justice.

I am not sure about discriminatory issue but the plan fiduciaries are required to make sure the fees are reasonable. Are the people going to get $5,000/year worth of service from the advisor? I have been in a 401(k) plan with a self directed brokerage account since 2008 and the plan charges me an extra $50/year to have it. I am hard pressed to see what I would get for $5,000. My guess is it is discriminatory also. But that is more a gut reaction then something I can prove. All and all I would rate the idea as a bad one.

This is total nonsense and should not be relied upon, but I'd clean it up and move forward. Nothing wrong with Prime+1%. I personally would have changed the loan policy (I think it would have been a better story), but either way I would not go crazy. Now if this is a very large plan with an audit, etc. perhaps my answer changes. But if we're talking about a 50 participant plan with a dozen loans, there are only so many hours in the day! Perfection is a very tough standard to meet.

Short answer - any insurance company that sells deferred annuities to terminating defined benefit pension plans with lump sum options should be willing to structure the annuities to permit the use of floating 417(e) rates.