Jon Chambers

I would worry some about simply retitling the account. There are very specific timing rules pertaining to distributions on account of death. While I have no idea what recordkeeping system you are using, I presume it has procedures for tracking deceased participants and ensuring that the distribution rules are followed. While QDROphile's comment about the title on the account being meaningless is correct, simply retitling the account could lead to other unrelated errors (because once the account is retitled in the beneficiary's name, system users will believe that the account belongs to the beneficiary, when it really belongs to the deceased participant, and must follow rules relating to the deceased participant). Conversely, I presume that your internal service department's requirement that the account must be in the beneficiary's name before a new password can be issued is an internal procedure, not a regulatory requirement. If you are certain that the participant is deceased, and that the beneficiary is the deceased participant's properly designated beneficiary, I see no legal or regulatory impediment to issuing a new password to the beneficiary. So your choice is to retitle the account in a manner that doesn't track reality, and could lead to other compliance issues, or to convince your internal service department that it should be acceptable under the circumstances to issue a new password to the properly designated beneficiary. Personally, I would lean in the direction of the latter approach. Hope this helps, Jon

It's possible to get 404© protection when an SDBA is one of the plan's options. Of course, there are still many requirements that must be met before 404© protection is available. I've seen the indemnification clauses on numerous election forms, don't believe they are valid or enforceable, and have spoken with numerous attorneys that share this opinion. Best regards, Jon

I don't believe that simply "making the prospectus available" gets you 404© protection. Some vendors try to finesse the requirement by providing the prospectus online, and having the participant check a toggle box indicating that they have reviewed the prospectus prior to completing any trade. I recommend that my clients distribute all prospectuses to all participants at least annually. This may be overkill, but it's a good way to comply with the information dissemination requirements of 404©. Hope this helps, Jon

ERISA makes ALL trustees fiduciaries by definition. We already established that (see 29CFR Sec. 2509.75-8). As Kirk and others noted, being a fiduciary does not mean that you have fiduciary responsibility for all plan functions, although you may have co-fiduciary duties, depending on the terms of your contract, etc. We agree on the ability of the DT to reasonably rely on a representation from the fiduciary prior to executing a trade. The point that you didn't address was DT liability when the directing fiduciary has not made a representation. Further, under certain circumstances, the FAB notes that it may not be acceptable for the DT to rely on the fiduciary's representation. For example, the FAB provides that a directed trustee may have to question directions involving the purchase or holding of a security where there are "clear and compelling public indicators" that call into question the issuer’s viability as a going concern. Which is exactly my point. A DT has different duties from a custodian, because a DT is a fiduciary (albeit, a limited fiduciary) while a custodian is not. Your question "Why be a DT?" is a good one. But since there are DT's in the market, I believe that my advice to clients ("Hire a DT, not a custodian") continues to be good advice.

I guess I don't see this as all that confusing. If you are a fiduciary, you are subject to fiduciary standards. The ERISA fiduciary responsibility legal standard has been described as "the highest known to the law." [Donovan v. Bierwirth, 680 F.2d 263, 272 (2d Cit. 1982)] . If you are not a fiduciary (i.e., if you are a custodian), you are not subject to fiduciary standards. If you are a fiduciary, you can have co-fiduciary duties. If you are not a fiduciary, you don't generally have co-fiduciary duties. Certainly a directed trustee, like a custodian, needs to take proper direction from another plan fiduciary. But since a directed trustee is a fiduciary, the directed trustee must take reasonable steps to ensure that the direction is proper (i.e., in accordance with the terms of the Plan, does not contravene ERISA, is not a prohibited transaction, etc.) If the directed trustee merely rubber stamps and executes the fiduciary's direction, they may be breaching their fiduciary duty to the Plan. As you note, directed trustees can require a representation from the directing fiduciary that the directive is proper, and can seek indemnification from the directing fiduciary. These are reasonable steps. However, they don't eliminate the directed trustee's fiduciary liability, they merely manage it. I've been involved in litigation where a directed trustee took no steps to ensure a directive was proper, and consequently, faced liability for executing an imprudent directive. I doubt that they would have faced liability had they been serving in merely a custodial capacity. Finally, in my opinion, it is "useful" to the plan sponsor to have a directed trustee serving in a fiduciary capacity, vs. a custodian in a non-fiduciary capacity. Of course, this is a judgment call on which reasonable people can disagree.

In general, a custodian is not a "fiduciary" (although they may conduct themselves in a manner that makes them a fiduciary. A directed trustee is a fiduciary (albeit, with limits on their fiduciary duties). This is one of the key reasons why we generally recommend that our retirement plan clients engage a directed trustee rather than a custodian. At least historically, the cost for directed trustee services has tended to be quite low.

You may be interested in the recent (Friday) FAB from EBSA: Federal regulators on Friday formally declared that directed trustees under the Employee Retirement Income Security Act (ERISA) are to be considered fiduciaries and are required to act prudently. The pronouncement came from the US Department of Labor's Employee Benefits Security Administration (EBSA), which released Field Assistance Bulletin (FAB) 2004-03. As they did in a legal brief filed in the Enron case, DOL officials said in the document released Friday that a directed trustee not only must carry out its duties prudently, they also must act solely in the interest of the participants and beneficiaries of employee benefit plans. The FAB did note, however, that a directed trustee may rely on the representations of the directing fiduciary unless the directed trustee knows that the representations are false. It also said that directed trustees do not have an independent obligation to determine the prudence of every transaction, nor do they have an obligation to duplicate or second-guess the work of the plan fiduciaries that have discretionary authority over the management of plan assets - though exceptions were noted in circumstances where the directed trustee had knowledge of "material non-public information." MORE at http://newsmail.plansponsor.com/cgi-bin1/D...bU10FkB0GL2N0A7 .

I'll disagree with dh, at least to a minor extent, on a couple of his points. But in general, I found the post thought provoking and sensible, so consider these observations "nits", not major disagreement: 1) Disinflation or deflation can exist--see Japan in the 1990s, or the US in the 1930s. Money supply is simply one of the factors driving inflation, the velocity of money (the number of times an available dollar is spent in any year) and Gross National Product (GNP) are also key factors (depressions such as the US experienced in the 1930s and Japan experienced in the 1990s tend to cause velocity of money to slow dramatically, so even as the government prints more money to stimulate the economy, less money is actually spent). But I agree that the conditions that make deflation likely are highly unusual, and that the probability for deflation has been overstated. IMHO, deflation is possible but highly unlikely. 2) The definition of national "savings" is typically gross national income less gross national consumption. If income is less than or equal to consumption, savings is zero or negative. For the purpose of this statistic, there is no distinction between whether "savings" are invested or held in cash equivalents. This whole topic is somewhat meaningless, as the more important factor is whether aggregate national wealth is increasing or decreasing. For instance, as people watched the value of their homes rise, they increased consumption through refinance techniques. For many people, their wealth was increasing even though their consumption was greater than their income, which isn't necessarily indicative of a problem. However, "zero net savings" may be indicative of a future problem, or of increasing costs of capital for our society as a whole. I won't bother to get into that now. 3) Social Security has some elements of a pyramid scheme and (at least currently) some elements of savings (because more is taken in than is distributed). However, since the Social Security surplus is "invested" in T-bonds, due to the vagaries of government accounting, it simply makes the Federal deficit look smaller than it is, so I see why dh argues that it is not really savings.

In my opinion, this is a grey area. I typically advise clients to pay search fees from corporate assets, not plan assets. One key element to consider is whether recordkeeping/admin costs are currently paid by the plan or by the employer. If the employer is paying recordkeeping/admin costs, and wants to do the search to reduce these costs, then the employer will be using plan assets for its own benefit. If the plan is currently paying these costs, there is a better argument that the search will benefit plan participants, by reducing costs that the plan would otherwise be paying.

Not to the best of my knowledge. And if there were, you would need multiple appendixes to summarize the exceptions to the short-term trading fees.

rlb, remember that 404© protection is transactional in nature. While you are probably right that when an employee selectis advice through an advisor that was selected by the plan sponsor, the sponsor no longer receives 404© protection, if the employee doesn't select the advice, the plan sponsor is still eligible for 404© protection, assuming the plan is otherwise compliant. And as mbozek and katherine note, assuming the advice is prudent, there is little potential liability, even if investment results are not good. This is why "advice" is so popular in many circles--if the advice generates a prudent result, liability is probably minimized. Exceptions might occur if the advice is conflicted, inordinately costly, or demonstrably imprudent.

Many of these issues turn on the degree to which the education/advice is "individualized" for the participant. For example, for many years, Fidelity has been providing an "education" tool that gives specific investment recommendations, including recommendations for investing in Fidelity funds. While this looks on its face like a prohibited transaction, Fidelity notes that tool will only generate one of four possible portfolios. Thus, they conclude that the tool is not truly "individualized" for the participant, and is therefore not "advice". Remember that it's not necessarily problematic to deliver advice. The real issue is the possibility for triggering a prohibited transaction if the result of the advice influences fees earned by the advisor elsewhere. Thus, the old TCW approach, where all funds charged the same expense ratio. TCW could deliver advice, without impacting its investment management revenue--whatever the advice, the fee would be the same. Similarly, the SunAmerica opinion relies on the fact that the "advice" is really coming from Ibbotson--developers of the underlying software model. Ibbotson is not a party-in-interest to the plan, so the advice doesn't trigger a prohibited transaction, even though the advice is delivered by SunAmerica representatives, who are parties-in-interest. My guess is that SunAmerica wanted to customize results, and wanted their portfolio models to be "advice", not "education". But you are correct in noting that they could have obtained a very similar result if they had decided to stick with education.

To answer your question directly, no, and no (at least not without litigation/subpoena). But why wouldn't the employer want to share a well-constructed IPS with an employee that requests a copy?

Here's some relevant info from IB 96-1 on what is not advice--basic premise--with appropriate disclosure, and relying on "generally accepted investment theories", you can do a lot before "education" becomes "advice". Note that the IB permits the identification of specific investment options in the models, without making the models "advice", however, if you name funds, you need to include "a statement indicating that other investment alternatives having similar risk and return characteristics may be available under the plan and identifying where information on those investment alternatives may be obtained": "Asset Allocation Models. Information and materials (e.g., pie charts, graphs, or case studies) that provide a participant or beneficiary with models, available to all plan participants and beneficiaries, of asset allocation portfolios of hypothetical individuals with different time horizons and risk profiles, where: (i) Such models are based on generally accepted investments theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over define periods of time; (ii) all material facts and assumptions on which such models are based (e.g., retirement ages, life expectancies, income levels, financial resources, replacement income ratios, inflation rates, and rates of return) accompany the models; (iii) to the extent that an asset allocation model identifies any specific investment alternative available under the plan, the model is accompanied by a statement indicating that other investment alternatives having similar risk and return characteristics may be available under the plan and identifying where information on those investment alternatives may be obtained; and (iv) the asset allocation models are accompanied by a statement indicating that, in applying particular asset allocation models to their individual situations, participants or beneficiaries should consider their other assets, income, and investments (e.g., equity in a home, IRA investments, savings accounts, and interests in other qualified and non-qualified plans) in addition to their interests in the plan. Interactive Investment Materials. Questionnaires, worksheets, software, and similar materials which provide a participant or beneficiary the means to estimate future retirement income needs and assess the impact of different asset allocations on retirement income, where: (i) Such materials are based on generally accepted investment theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over defined periods of time; (ii) there is an objective correlation between the asset allocations generated by the materials and the information and data supplied by the participant or beneficiary; (iii) all material facts and assumptions (e.g., retirement ages, life expectancies, income levels, financial resources, replacement income ratios, inflation rates, and rates of return) which may affect a participant's or beneficiary's assessment of the different asset allocations accompany the materials or are specified by the participant or beneficiary; (iv) to the extent that an asset allocation generated by the materials identifies any specific investment alternative available under the plan, the asset allocation is accompanied by a statement indicating that other investment alternatives having similar risk and return characteristics may be available under the plan and identifying where information on those investment alternatives may be obtained; and (v) the materials either take into account or are accompanied by a statement indicating that, in applying particular asset allocations to their individual situations, participants or beneficiaries should consider their other assets, income, and investments (e.g., equity in a home, IRA investments, savings accounts, and interests in other qualified and non-qualified plans) in addition to their interests in the plan. "

In this situation, I'd be looking for a new document vendor, as they are not only wrong, they are quite obviously wrong, and appear to be sticking to their (wrong) beliefs in the presence of clear information (an IRS challenge) that they are wrong.

FJR, don't worry about the broker (or at least not about the brokerage firm). There are numerous ways that brokerages get paid in addition to the 12(b)1 fee, ranging from (soon to be illegal) directed brokerage, payments for shelf space, volume overrides, marketing support payments, etc. My guess is that in alanm's case, there is not a traditional broker involved (i.e., an individual responsible for selling funds to the plan), but that alanm's firm or an affiliate is serving as the "broker of record" for purposes of receiving 12(b)1 fees. The rationale for the 12(b)1 fees is to reduce plan administration charges, hence the fee offset and reallocation of excess amounts back to plan participants. I do have a couple of remaining questions, and would be interested in alanm's thoughts. First, are there any concerns by your firm or your client about the type of disclosure being provided to participants? If you distribute the fund prospectus to participants, fund expenses are overstated, since some of the 12(b)1 will be returned to participants. And due to the timing issues you note in an earlier post, the fund's effective expense ratio isn't simply the stated ratio minus the reallocation rate--it's more complicated than that, as the reallocation lags the deduction by 3 to 12 months, and as participants may have transferred between funds, taken loans or distributions etc, changing the composition of fund balances between the time of the deduction and the time of reallocation. I've seen vendors suggest this approach, but I've always struggled with the mechanics of disclosure. Second, have you considered simply using lower cost share classes? Virtually all funds that pay 12(b)1 fees also offer an institutional share class, and it's often possible to qualify for the institutional share class at the omnibus level. I generally believe that plans are better served by seeking to minimize embedded investment expenses, and charging hard dollar fees against plan assets where necessary or appropriate, rather than maximizing revenue share, and reallocating excess revenue share back to participants. However, I acknowledge that the latter approach is more prevalent than the former, particularly in the small plan market. Thanks for your helpful comments. I look forward to your thoughts on my questions.

Having a SAS 70 may be a competitive advantage (or a necessity) if you want to work with larger plan sponsors. I generally advise clients to request a copy of the SAS 70 when they are considering engaging a recordkeeper, as it provides some insight into the internal controls that the recordkeeper has established. While not having a SAS 70 is not necessarily a deal breaker, it may serve as a yellow flag, requiring more caution and diligence by the sponsor. At this point, most of the larger TPAs in our area obtain a SAS 70 as a matter of course--the market seems to be requiring it.

OK, I'll get a bit more specific with an example of an "atrocity". Company funds a profit sharing plan with annual contributions. Contributions are subject to vesting schedule, and aren't eligible for in-service withdrawal. Participants are allowed to select whatever brokerage they want. Numerous participants choose to invest with friendly broker from major wirehouse firm. Each participant completes account application form, doesn't indicate that accounts belong to the plan. Broker establishes accounts as participant owned rather than trustee owned--earns large bonus for exceeding goal for establishing new relationships. Company funds contributions, making deposits to each individual brokerage account. Participants visit broker, ask to withdraw funds. Broker submits paperwork, closes accounts, participants leave brokerage firm with checks in hand. IRS audits plan--claims plan has violated 401(a) and its own terms. Threatens disqualification. Brokerage firm disavows responsibility for its actions--indicates plan sponsor should have known that the brokerage accounts weren't owned by the trust, and notes that participants completed invalid account applications. Further, brokerage is explicitly not a fiduciary. IRS doesn't care who is at fault, but sees a disqualified plan. Plan engages ERISA counsel to negotiate with IRS. IRS agrees that plan can reinstate accounts for participants who withdrew their funds by making an additional contribution, plus imputed earnings. Plan sponsor out enormous costs for ERISA counsel and duplicate contributions. Sure, they could pursue their employees for the duplicate account, but they don't want to incur more legal costs. Could pursue claims against brokerage firm, but they have top law firms representing them, and indicate that they have no willingess to settle. Plan sponsor is basically stuck with the problem, and all costs of resolving problem. Did this happen? Yes. Have I seen other similar situations? Yes (but admittedly, this was the worst). Do I buy mbozek's argument that plan sponsor's shouldn't worry about qualification violations by third parties. No.

mbozek--I agree with your points. And all that you say doesn't change the fact that brokers regularly can and do violate both plan terms and IRC 401(a) through their conduct (it's generally inadvertent, but uninformed behavior). Some brokers simply shouldn't be handling qualified plan assets. I'll take the potential 404© issues over a qualification problem any day.

I've seen many problems with this structure. The issue is generally that the trustee is dependent on the competence of the brokerage firm establishing the account. Where the account is properly structured as a qualified plan asset, and the brokerage firm knows how to run qualified plan accounts, problems are minimal. However, not all brokerages know what they are doing. I've seen participants close accounts and withdraw all funds, with no qualifying event for a distribution. I've seen accounts established with margin capabilities, where the plan does not permit such an approach. Under this type of structure, you should expect that a broker will eventually disqualify your plan. And the letter suggested is essentially worthless. As others have noted, it may help with your 404© compliance, but I bet you don't have that anyway. I would strongly recommend consolidating all accounts with one brokerage that has been appropriately screened by the trustee. Otherwise, the plan is a ticking time bomb.

How about select less expensive funds with lower revenue sharing, and eliminate the problem altogether? While I doubt you will be the test case, beware of the litigation of the future--excessive revenue sharing as a per se fiduciary breach, violating the basic fiduciary duty of cost control. If you have to pick a corrective approach, I'd allocate like income, not like forfeitures, since the revenue sharing is generally based on asset levels, not income levels.

To clarify my earlier comments, the "master trust" Form 5500 filing that I referenced was both a "Multiple Employer" plan, because it covered more than one employer that was not part of the same controlled group, and a "Master Trust", because it covered more than one plan of a controlled group. I think my earlier comments may have attributed the "Multiple Employer" characteristics to the "Master Trust" filing status. Sorry for any confusion that I created. The bottom line is that this particular structure accomplished what Retina was looking to do--technically unrelated employers participated in a master trust arrangement. These plans were all individual account arrangements, that required that each plans assets could only be used to pay benefits for that plan. The master trust arrangement was solely in place to provide economies of scale for the investment managers.

Here's an anecdotal reply--prevalence is low (I've never seen a plan use this option, although I've seen it marketed, and was generally aware of the PLR). Viability is reasonable, due to the PLR, although I can envision numerous operational problems, particularly with prototype plans. I'd guess the viability would be highest where the "401(k) product" is a bundled arrangement with an insurance company that also offers the disability coverage, and integrates the disability coverage with the 401(k) arrangement. That being said, I'd make absolutely certain that all commission/compensation arrangements were investigated and disclosed--my guess is that the bulk of the benefit to these arrangements goes to the insurance broker that sells them!

It depends what you mean by "ok". Is it legal?--yes. Is it complicated?--yes. The only time that I have worked with related employers that were not part of a controlled group and that maintained a master trust for non-union independent plans sponsored by the related employers, the primary plan was quite large (more than a $billion), and the plans of the related employers were also significant, although smaller. The employers decided that the benefits of a single trust outweighed the compliance costs of maintaing a master trust. I doubt that smaller employers could rationally reach a similar conclusion. Union plans operate under a different (generally simpler) compliance structure. While I understand that a union multiple employer plan could be structured under a master trust, I don't believe that this is necessarily a requirement for a union multiple employer plan (I believe the union can sponsor the plan, have a regular trust, and simply mandate that the employers contribute to the trust). But beware of advice from me on this topic--I don't generally work with union plans.

Sorry FJR--I didn't mean to be pejorative. What I intended to say was that the Fidelity mandate was that participants with existing positions in the fund could continue to purchase the fund, while new participants and participants without a position in the fund could not. This is an operational decision by Fidelity that is supported relatively easily by Fidelity's recordkeeping system, but is not supported by many (most?) other recordkeeping systems. From my perspective as an investment consultant, the distinction goes to whether the technology underlying a recordkeeping system was designed to be primarily a mutual fund tracking system, or a plan account tracking system. Each approach has strengths and weaknesses. The mutual fund based tracking system may be good at tracking mutual fund issues such as semi-hard closes, short-term trading fees, etc., but may not be as good at performing compliance tests, 5500 reporting etc. The plan account tracking system may not do as good a job with the mutual fund issues, but may be better at compliance functions. Thus, my point was that PAL100759should note that the recordkeeper's implementation of the Fidelity mandate provided useful information about the underlying recordkeeping system. Whether this is positive or negative is for PAL100759 to decide. Sorry if I offended anyone. Finally, back to the original request, here is a link to a story on the closure. http://www.sfgate.com/cgi-bin/article.cgi?...L&type=business