Jon Chambers

Tom's suggestion is more realistic, but only 50% of the account could be borrowed, we face the double taxation scenario common to plan loans, and are probably prohibited from lending to an owner/employee anyway.

Avoids taxation and generates a thorny nest of ERISA and SEC issues that cost far more to resolve than the entire cost of forming the business. This is a different thread, but I can't think of a worse way of trying to get around taxation.

Generally, companies running plans for bargained and non-bargained plans offer the same distribution options through both plans, precisely so that they can transfer participant balances between plans without an elimination of an optional form of distribution. Years ago, I worked with a plan that transferred dozens of balances each year. Back then, there was a requirement to report transfers on an IRS form (5310, from memory). That filing requirement has subsequently been eliminated. I continue to see this approach on a regular basis when I work with clients that have both bargained and non-bargained employees. As long as the plans are designed properly, the inter-plan transfer should be know big deal

Kirk, as you know, I'm an investment consultant, not an attorney. My point was that I do see service graded matches in the market, and that my (limited) understanding of the compliance requirements were that you had to do 401(m)/ACP testing, plus additional testing. As Tom and RJT point out, I incorrectly referred to the additional testing as "coverage", when I should have referred to it as "BRF", and indicated that it was "not a big deal". I'm sure the testing isn't easy, didn't mean to downplay it. But as long as you have the right participant population and can pass the test, the service graded match approach is a reasonable and valid plan design that may address many companies' benefits objectives. Perhaps due to the testing complexity, we see service graded matches less frequently than might be appropriate if benefit design were the only relevant consideration.

I had a client that used credit card tips as a source for deferrals. Since the employer collected from the credit card company and then forwarded the tip to the employee, they had the opportunity to withhold elected 401(k) amounts. Seemed to work pretty well.

Pretty sure it's permissible--why wouldn't it be? It's just a plan-to-plan transfer, and it's done regularly. Of course, plans must permit it.

It's definitely possible, used in practice, but relatively infrequent. Probably less than 1% of plans use a service graded match. I believe testing is just 401(m), you probably need to do a coverage test (410(B)) on each match rate. Otherwise, it's not a big deal.

Hi Brad. We haven't talked for a while. Given your fact pattern, I'd strongly suggest a 401(k) structure over a SIMPLE. And be prepared to spend some money. It doesn't need to be a lot, but if you go too cheap, you will regret the decision, and it will cost you more in the long run. Safe harbor designs are good but not essential. Primarily, you want to select a plan provider with flexible operations, good documents, and the right fit for your needs. And your plan design should let you grow into where you want your company to be in the future.

If the document is silent, I would say that match is permitted, and possibly even required.

That depends on the provider. It's impossible to generalize. Some providers won't do paper transactions. Some won't do electronic. Some will do both, for the same fee. And some charge different fees. What's the purpose of your question? Are you a provider faced with a truculent plan sponsor client, or a plan sponsor facing an apparently unreasonable service provider fee?

Yes, that makes sense to me. Also, the repayment amount and rollover amounts are likely to be different, due to market value fluctuations. It seems that the repayment should be the original distribution amount, that could come from rollover funds, and, as MoJo noted, should be accounted for as if it were the original amount (i.e., vesting and in-service distribution restrictions would apply as per your plan), while the remaining amount of the funds to be "rolled over" (if any) would be treated in your plan as a rollover amount.

QDROphile makes a good point that prospectuses don't represent the only required information for 404© protection, but I think this point is consistent with my second post, above. I indicated that in addition to distributing prospectuses, you need the additional 404© disclosure, which is normally part of the Summary Plan Description. With regard to proxy pass through, I've never worked with a plan that passed through proxies on mutual funds. On this topic, the Reish & Luftman article cited earlier in the thread states: "After investment, participants must be provided with plan materials related to the exercise of voting, tender, or similar rights. If there are plan provisions regarding the exercise of such rights, participants must receive a description of or reference to such provisions. While the plan is not required to pass through such rights, Section 404© relief is not available to the extent that plan fiduciaries exercise the rights." I take this to mean that plan fiduciaries that vote proxies are responsible for how they vote proxies. Frankly, I don't see this as a big deal. My general point is that there seems to be some conventional wisdom that states that 404© protection is extremely difficult to get, consequently, the protection is limited. It seems to me that for a daily valued/daily traded plan invested in appropriately selected mutual funds, you really only need to do three things to get 404© protection: 1) Include an appropriate 404© disclaimer in the SPD or elsewhere. 2) Distribute prospectuses on a timely basis. 3) Have a named fiduciary that will provide the optional/on request information. Certainly, compliance gets tougher if there is company stock, funds other than mutual funds, etc. But the three step approach described above seems like a reasonable course of action for the vast majority of plans out there. Does anyone disagree?

And now we can go to issue three. What is reasonable: This will be a function of account size. Let's assume that the pooled option is an institutionally managed fund charging 50 basis points (0.50%). All other options are mutual funds charging 1% or more. Participant has a $1 million balance. Currently, participant pays (at least) $10,000/year to own mutual funds. Even if participant were only person to elect to use pooled option, they would still pay $10,000/year ($5,000 base fee + 0.50% x $1 million). If other participants elect to use the fund, our trailblazing participant will pay less than $10,000/year, as the base fee is amortized across more participants. Generally, I'm uncomfortable with total fee/expense charges in excess of 2% of account balances. If the participant only had $10,00 in his account, the $5,000 base fee would represent 50% of his account. Permissible? Perhaps. Reasonable? Certainly not. In this event, I believe the plan sponsor has a fiduciary responsibility to prevent the participant from incurring unreasonable expenses. Thus, the sponsor should either: 1) Pick up base fee charges, if they believe the pooled option is an important benefit enhancement, or 2) Not offer the pooled option Does this help?

I'm getting a better sense of your question. Let's consider two issues: 1) What is permissible? 2) What is practical? First, charging reasonable fees for plan administration against plan assets is clearly permissible. However, you also face the issue of what is practical. Let's say, for example, the trustee and TPA fees for the pooled option are $5,000/year. If one participant selects the option, it costs that participant $5,000. If 1000 participants select the option, it costs them (on average) $5. Thus, you face a difficult communications and investment education issue. With clients that want to pass fees through to the Plan, I typically address this by determining, at the Plan level, what investment structure (i.e., type and range of investment options) make sense for the plan as a whole. Then, all fees for supporting the investment structure are charged against all plan assets. Thus, in your pooled option example, all participants cover the cost of the pooled option, since they all have access to it, even if they don't select it. This helps the client focus on: whether the pooled option is a worthwhile addition to the plan's overall investment structure; and whether cost of adding the pooled option is justified for the plan as a whole. A similar approach can be taken with respect to brokerage accounts. However, as a practical matter, I typically see a slightly different result. Let's assume that the vendor charges an additional $3,000/year to offer brokerage accounts, plus $100/year per brokerage account. Clients I work with typically pay the $3,000/year from corporate assets and pass through the $100/year per brokerage account to participants selecting the option. Brokerage account availability is perceived to be a benefit enhancement that should be paid by the employer, while direct brokerage account charges are costs to be borne by individual participants. And it seems unfair to charge participants that don't want a brokerage account extra, even though this conclusion may apparently contradict the general rule, above. Finally, it's important to clearly establish the employers policy for expense charge throughs. I find the investment policy statement (IPS) is often a good place to do this. Further, all expenses should be clearly communicated to participants. Does any of this make sense.

Good question. My gut says yes, but you can't cite my gut. I'll be interested in responses from the attorneys out there. I'm assuming that your plan provides cash out/pay back language for forfeiture restoration, rather than an "R x D" calculation.

Assuming expenses are reasonable, plan document permits it, and there are no other constraints (e.g., party-in-interest transactions), expenses can be charged to participants on a pro rata basis.

Most bundled providers will mail the prospectus in this scenario. From memory, the regs provide that it's ok to provide info within a reasonable time following initial investment.

My post was intended to address k man's example. We've worked with numerous ERISA attorneys that don't see a problem with charging our firm's fees for fund selection and monitoring to the plan (we are an RIA). I do see RCK's point also. Some services we provide (such as vendor selection) are clearly supporting settlor functions, and these fees are paid by the sponsor. I guess a similar argument could be made for fund selection fees. However, our position is that following initial fund selection, selecting new funds is more of an ongoing plan operation and fiduciary monitoring function, so can be a permissible plan expense. At least one of our clients has been audited by the DOL, and they didn't raise an issue. If we extrapolate RCK's argument a little, and apply it to commissions paid to a broker that renders advisory services, we might reach a different conclusion. A broker that conducts a vendor search that is paid with commissions from the plan is providing a settlor function that is paid with plan assets. Does anyone think that this is a problem? Finally, we always discuss the pros and cons of paying fees from corporate or plan assets. Briefly, if paid from corporate assets, the company can deduct our fee as a normal business expense. If paid from plan assets, a tax-deferred vehicle (the trust) incurs the expense, hence lower future tax-deferred growth. Given these facts, most of our clients pay our fee from corporate assets.

Not as long as they are reasonable. We have several clients that pay us from plan assets (of course, our fees are very reasonable).

In my humble opinion, "provided" means "provided". I think you can satisfy all the required disclosure relatively easily by providing participants with prospectuses, and including the other disclosure (e.g., plan is a 404© plan, named fiduciary for providing investment info, etc.) in the SPD. This is what we do for clients. If there is any definitive opinion that less disclosure is required, I'd love to hear it.

In my opinion, you have neither a qualified plan nor a fixable problem. As a practical matter, the best solution might be to terminate plan, distribute assets, not permit rollovers (since source was not qualified), and don't withhold taxes. I'm not sure how I'd report distributions--on a 1099 maybe. Then hope that nothing gets audited. Note that none of this is "legal"--it's just a practical way out of a bad situation. A possible alternate solution is a retroactive amendment excluding the 9000 temps, and an EPCRS filing, although I'm not sure that this could work--how could you possibly pass coverage? Finally, there's the "come clean" alternative. Restate 1998-2000 W-2's for the 40-50 employees, have the employees amend their 1040 returns, include plan investment earnings in each year's taxable income and amend corporate tax returns to eliminate any deductions for plan contributions. Basically put everyone back where they would have been if the plan didn't exist. This is the legal approach. I'd suggest that your client needs to get competent tax and legal advice to figure out how to get out of a really big mess.

And even when the brokerage firm sets the minimums, you should test availability to HCEs and NHCEs for coverage just to be safe (I have a number fo clients that do this).

I've seen this type of language. Although it seems like the statement might be a relevant fact that the courts might consider in potential litigation, I would agree that nowhere in ERISA is there a clause that requires participants to promptly review statements and inform appropriate authorities of any errors. So the policy is probably not enforceable. But it still might be valuable, because it may encourage participants to review statements more closely, and inform their employers of potential discrepancies in a more timely manner, even if the strict terms could never be enforced.

Sorry I missed the start of this thread--it's been quite dynamic. Kevin, I think the reason that you haven't received any unique suggestions is that there really aren't any out there. This stems from how fiduciary issues regarding investment selection come into play. When employees have no choice regarding investing in employer stock, the regulatory framework provides the employer with broad latitude regarding fiduciary responsibility for offering employer stock. Briefly, unless the fiduciaries have knowledge of some huge impending event (such as bankruptcy) that clearly makes the company stock an imprudent investment, they can offer the stock without facing much liability. I recall a case 10-15 years ago involving the department store chain Carter-Hawley-Hale where fiduciaries were sued for continuing to mandate that company stock was the only investment choice, even as the company went into bankruptcy. Not sure as to the resolution of the case. The issue becomes more complex as company stock is one choice among many. Now, any action by the employer to influence employees investment decision may be perceived to be: a) investment advice--generally impermissible, if it comes from employer b) conflict of interest--as the rationale behind the stock purchase recommendation may be perceived as primarily intended to support company's stock price, by increasing demand for stock, rather than helping employees manage investment process and maximizing plan benefit (see claims in Air Touch/SBC litigation, where plaintiffs claim that mapping of proceeds from Air Touch stock sales into SBC stock were designed to artificially inflate price of SBC stock, hence creating a prohibited transaction). As another thing to consider, the 404© regs have some very specific reference to how company stock must be handled as an investment option if the sponsor seeks 404© protection for fiduciaries. Briefly, the plan must be structured in a way that sponsor cannot influence employee's decision regarding investment in company stock. Finally, when the plan transitions from employer directed (into company stock) to employee directed, a host of SEC issues arise. Don't have time to go into these here. Kirk Maldonado is an expert on these. In conclusion, I think that most companies conclude that it would be imprudent to design plan features that permit employees to choose whether or not to invest in company stock, but then attempt to influence the decision. The only suggestion that I might make is that the company could elect to pay all administrative expenses for the portion of the plan invested in company stock, while passing through costs for the portion of the plan invested in other funds. I know it's not much, but it's something. Hope this helps!

Although it is a fiduciary duty to be sure that fees are reasonable, given services provided. When a fund includes fees specifically earmarked to compensate a financial advisor for providing investment education services, and those services aren't delivered, I'd suggest that it would be a breach of fiduciary duty if the sponsor doesn't either get the services or transition to funds that don't have the fee. I may be tilting at windmills, but...