MoJo

I don't disagree that a brokerage account is a BRF - the question is, is it discriminatory if the requirement for opening one are not plan or plan sponsor requirements, but are rather imposed by a brokerage house? Let me pose another hypothetical - a provider allows use of any brokerage account within the plan. Smith Barney and Merrill Lynch both participate - but SB requires a minimum balance while ML does not. Is that discriminatory because some participants can't get SB as a broker (but can get ML)?

Good question, KJohnson - but there may be a distinction as well there. The distribution of benefits is an ERISA "right," and the selection of a provider that will only provide distribution options to certain large account balance participants may be a breach of a fiduciary duty, as well as discriminatory. Selection of a provider that offers outstanding services, but with a restrictive brokerage option (which is certainly far from an ERISA "right") does not cause one to consider the fiduciary implications - just the discrimination ones. The question still remains - is it discriminatory for a sponsor to select a provider knowing that certain restriction prevent all participants from the same level of service? Let me -put it another way - would it be appropriate (philosophically) to select a mediocre provider over a superior provider just because the mediocre provider could offer all the bells and whistles to all participants, and the superior provider restricted certain high cost options to those with minimum balances? I would think not. The question then becomes whether under current law, it is discriminatory. I've seen IRS officials as well answer that question in different ways, at different times. Just to play devils advocate (which is my forte'!) - there are MANY instances I've seen where it is in fact practically impossible to provide a plan specified distribution option as a result of the size of the balance - specifically annuity distribution options. I don't beleive it is uncommon for insurance companies to refuse to bid on a single life, or joint life annuity for a participant's distribution, if the amount involved is small. Is it discriminatory because one cannot find an annuity provider that will write a $1.50 per month annuity.

I think a distinction can be made between a broker imposed minimum and one imposed by the plan. In the former, the requirement is one of profitability and operational efficiency (in the same manner that bundled providers require a certain minimum number of funds in a line-up to be proprietary, etc.) and the latter is one of a sponsors motivation (either discriminatory, or paternalism, etc.). The ultimate question really is: Is the plan sponsor (and the plan) discriminatory by virtue of selecting a vendor with a brokerage product that contains those minimums? That is tougher question, and one that can't be answered in a vacuum, and is dependent on all of the criteria used for selecting the vendor. If the vendor were the best choice, but for the brokerage requirements, is it then impermissable to allow some of the participants to partake of the brokerage option when others cannot as a result of the minimum requirements? Let me ask another relted question: Would it be a BRF discrimination issue if the vendor charged a fee if the brokerage account did not maintain a minimum balance (ie the account would be charged $10 if at any time during the month the brokerage account balance was less than $10,000)? Or how about a fee if there were less than 5 transaction per month?

I'm aware of one service provider that does this - a bank. The way they handle it is by utilizing their trust accounting platform as an order entry system. A broker, from whatever brokerage house the participant selects, has limited access to the trust accounting system for purposes of placing trades. The system then sends the actual trade request back through the broker for execution (and commissions!). Since the trust accounting system clears all trades, the service provider has all information for purposes of reporting. Also, custody of the assets remains with the bank, and a shadow account is on the books of the brokerage firm. Monthly trust accounting statements are then generated for both the participant and the broker (to ensure balance with their system). The ultimate question is why do this? For the service provider, not only do they lose management revenue from the loss of managed assets, they also lose out on commission income from the trades.

Greg: My sentiments exactly! As a "recovering" attorney (I bill myself as an internal consultant for a service provider) I have spent the last upteen years of my professional life working to increase participation in plans (and working with the sales group to sell that service to clients and prospects), always being hindered in the activity by what my boss refers to as the "anti business squad" aka the law group. When did "practicality" leave the legal decision making process anyway.....

Kjonhnson - I recall the same case - I think it involved a golf outing at some plosh resort for trustees and spouses or significant others - where the DOL said the service provider *was* using plan assets, through ridiculously high fees, to offset the cost of the boondoggle. Thanks everyone for the replies - It was a bit of a reality check - but I'm dealing with a corporate law department that seems to be dead set on stopping the practice of giveaways at plan enrollment meetings, and have the backing of a well respected regional law firm....

I'm trying to find authority on the issue of whether or not enrollment meeting gifts and giveaways (provided by the plan service provider and not the sponsor) constitute a prohibited transaction. The types of gifts and giveaways we're talking about generally are nominal in scope (calculators, pens, etc.) and may be accompanied by food and beverage (of the adult variety!) as an inducement to get employees (and sometimes spouses) to attend the meetings. I can't seem to find any good discussion or authority on point. Any help would be appreciated....

Its a big mistake, jlf.... A db benefit still provides the foundation for a secure pension benefit. Lets not start that other thread all over again....

Dick: mPower spends $10 million a month of venture capital money, over and above revenue (i.e. - they are living on borrowed money/time). FE isn't much better.... tshenk: I agree - most of those using advice are probably those looking more for confirmation of their own choices, rather than direction. I can't say how many participant who have it available are using it, but I can say the service provider that I work for makes it available, but so far has had no plan sponsor takers - and hence zero participants have it available. I don't think there would be a problem in having professionally managed money plus choice, but look at "lifestyle funds." Theoretically, a participant should choose ONE fund, that most closely matches their criteria. My experience has been that most participants spread their money among the three or four lifestyle choices, beleive it gives them some diversification, or something.... I hesitate to think that have a pro-managed choice would garner the same response from participants....

Perhaps we're comparing apples and oranges here, but I disagree, Richard - at least with the current state of the art. Advice (and we are NOT talking full fledged financial planning) doesn't even begin to tackle the problem - it is constrained to be a tunnel vision view of a participant's financial situation. Most participants are loath to disclose anything personal or financial to anyone remotely connected to the employer, and most of the on-line advice providers simply do not collect sufficient participant level finaincial information to do a really good job of providing customized (read: applicable) advice. Full fledge financial planning would be a better solution, but it carries with it a significant cost - which arguably the employer has no business, nor interest, in providing. This gets down to the philosophical debate over: give a man fish, and feed him for a day, vs. teach a man to fish, and feed him for life. Frankly, given all I've seen, we're basically in the middle. Either we should go back to professionally managed funds (which I would bet would give rise to mutinous non-participation by rank and file employees), or we should stress the importance of learning and planning, and let the participants find their own advisors to do so. Maybe there can be a soft dollar way for a plan to subsidize that (Congress? ya listening????). Absent that, I couldn't, in good conscience, recommend to my clients they take on any liability for advice (and yea, I know FE and mPower indemnify - but with a run rate of about $10million a month, how much longer do you expect either to survive?). People need to realize their limitations, and act accordingly - without further burdens and liability on their employers to do so. If they want to the employer to be responsible here, then the empoyer shold go back to professionally managed pools of assets....

The interesting part about the EBRI article is that it only surveys 401(k) account balances - we do not take into consideration other financial assets of the participants when we evaluate this issue. I'm probably not your typical 401(k) participant, but the approach I take is to be more conservative in my retirement assets, and more aggressive in my non-tax sheltered investments. This actually makes sense, considering the aggressive investments are capital gain producing investments, while the more conservative portion of the portfolio is income producing (which benefits more from the tax sheltering). I aggree, however, that our focus in this business may be misguided. First we give participant choice, then we educate, then we realize that education isn't working, so we advise. Hmmmm. Maybe we shold go back to professionally managed (or provide a professionally managed pool as an option - as has been suggested). I don't think the life-style scenario will play out - expense, and returns have plagued those funds, and they have generally not been a palatable alternative.

Was it an asset purchase or a stock purchase? If the two companies merged (stock purchase/merger) then the surviving company is the successor of the merged company, and there could still be a successor plan issue....

What about 401(k)(10)? We don't know if this is an asset purchase or stock purchase, when (and who) terminated the plan. Distributions may be prohibited under the successor plan rules... More details, please....

I'm going out on a limb here, but I think there is no PT if the trustee is acting only as a conduit, and the profits are used to offset plan expenses. Same with UBIT. I used to work for an insitutional trustee that did this a lot (other side of the house from me), so I'm sure there is a way....

Be careful as well about state wage and hour laws. Many state will allow an employee to cease payroll deduction (nothing in ERISA mandates payroll deduction, and presumably ERISA does not preempt these state wage and hour laws as it relates to loan repayments). If that is the case in your state - the participant may be able to cause a default on the loan by demanding the cessation of payroll deductions.

I think the fundamental issue is: Is it a 'prudent" exercise of fiduciary responsibility to offer a PBA in a qualified retirement plan" when clearly the statistics (and practice) indicates that the average participant is incapable of manageing even among limited choices, let alone unlimited ones. I hate to be paternalistic, but we're heading for a crisis when a bunch of boomers realize they can't retire at the lifestyle they have become accustomed to. And whether you believe it justified or not, there will be lawsuits - and considering the trend in scruitinizing investment offerings (New York Life appears to be the next defendant), the lawsuits may have some potential. The courts will likely treat PBAs as another option, and if it wasn't appropriate for the majority of the participants (despite the disclosure, etc.) then it may be ruled imprudent. Maybe not what was intended under the 404© regs, but probably closer to reality. In any event, any time any of my clients is hauled into court, they've lost, whether they prevail on the merits or not.

Well, that raises the question considered in previous posts - can you comply with 404© with a brokerage account option? Absent 404© compliance, ERISA is clear that the fiduciary is liable, *even* in participant directed accounts.

I think you confuse my point, jlf. I don't agree with the precept behind the pension portability bill. I think it is the desire of employers to shed responsibility for former employees, soon to be codified in the pension portability bill, that encourages distributions and spending of defered comp (i.e. retirement income savings). Interestingly, Hewitt just came out with a study (reported on 401kwire this morning) that indicate 68% want taxable lump sum distributions, 6% would roll into another plan, and 26% would roll the money into an IRA. Scary statistics, considering most won't have sufficient assets to retire on, even if roll-overs were 100%.... I think in-service withdrawals (defined as a w/d prior to actual retirement (with some exceptions for documented hardships)) should be prohibited from qualified retirement plans. If we want/need a non-retirement deferred comp platform, then lets build one - but ONLY AFTER retirement income savings have been funded. I hate to be paternalistic - and that is not my intent - but it is only through government intervention of this sort that we can eliminate the need for tax supported systems (SSI, welfare, Medicare/Medicaid, etc.) and change the perception that these are entitlements, rather than safety nets.

Another interesting thread. Perhaps we confuse "portability" with "withdrawability." I agree, Ray, that the current trend of "more control for the beneficiaires" has created a tide of non-rolled-over withdrawals. Perhaps we need to separate "deferred compensation" from "retirement savings." I think they are one and the same (the sole reason for income deferral is future income - whether it be employee, employer, or a combination funded arrangement) - but alas, I am probably in the minority. Others perceive the benefit in tax deferral - although I learned long ago not to base significant financial decisions (solely) on tax issues.

The DOL rule has broader implication, and includes distributions. I believe the rule indicates that while the "plan" may pay any reasonable fee associated with the operation of the plan, participant level fees can only be charged for those services not inherent in the provision of benefits to the participant. Hence, a plan really isn't a plan unless it distributes assets - so distributions can't be charged to the participant receiving the distribution.

It is a maxim of the law that state sovereignty is supreme, unless specifically reserved by the Constitution (or the laws promulgated under it - including ERISA). The state tax withholding issue isn't unigue to ERISA plans - it is applicable to all trusts (personal, etc.) with multi-state beneficiaries. I agree a uniform approach would be nice, but don't think the feds should be messing in state tax withholding issues.

It's probably because preemption applies to only those things which are inconsistent with the federal statute. State and local income taxation of retirement plan distributions is not inconsistent with either the letter or spirit of ERISA. The point of the plan is tax deferred income, not tax free....

I agree Jon, that the approach you have is probably the most prudent, but yet the DOL has been inconsistent on the issue. Obviously, the use solely of brokerage accounts would be a problem in the DOL's view (as the plan fiduciaries are not exercising tehir responsibility to "select" appropriate investment funds. But then, by "actively selecting" a brokerage option, would not the fiduciary be advocating that as an appropriate vehicle for the investment of plan assets? Keep in mind, that restrictions on the use of a brokerage account to some only would be prohibited as a discriminatory benefit, right and feature. Hence - the mere allowance of the accounts must mean that the fiduciary has determined that it is more appropriate than not, for the "plan and all of its participants." Its a classic catch 22. The DOL needs to clarify formally, or a legislative change needs to occur. Couple this with the recent trend towards providing advice, and the whole scenario becomes ridiculous (i.e. if participants need advice, why are giving them more and faster ways with which to demonstrate their lack of understanding of the investment process?) Can't be all things to all people. Maybe its time go back to professionally managed assets. Stats indicate they consistently outperform participant directed....

Not that I agree with the DOL preamble, but it is precisely the point that KJohnson is raising that I intended to address in my prior post. The brokerage option does seem to be the wave of the future (current) but one must question whether, given the transactional nature of the 404© protection, such a feature is consistent with the spirit of the regs. I've yet to see a brokerage option that is "seemless" with the core options in the plan (usually a day or two lag in transfers, etc.), and have never seen a platform that can effectively guard against plan or ERISA prohibited investments (i.e. how does one prohibit the purchase of employer securities in a brokerage account, when employer securities are not authorized in a plan (as I read the requirements - plan authorization and restriction are required under ERISA) and worse yet, what about 16b implications?). The problem here, is that 404© protection is only afforded where the plan sponsor prudently selects the investment options. Is a brokerage window an option, and if so, is allowing it considered "prudent" with no parameters around it or restrictions on investments within it? [This message has been edited by MoJo (edited 05-11-2000).]

Not to raise new issues - but I think an argument could be made that a self directed brokerage account could never be 404© compliant. 404© requires that participants be given sufficient information to make "informed" investment elections. By offering the world, you are essentially committing to educating participants to be investment professionals in the general sense -rather than retirement asset allocators, as you would with a limited number of investment options in the plan.