Jon Chambers

Absolutely yes. The MPPP has no impact on the deferred comp limits.

My big problem with this idea is that investment management is like any other business. If you buy wholesale, you get a good deal. If you buy retail, you pay more. Plans that limit investment choice to just a few funds reap numerous benefits: 1) The funds can be screened by the sponsor and their advisor to ensure that they are reasonable and appropriate options. 2) The funds can be bought "wholesale" (i.e., using institutional class shares, or other low cost approach). 3) The funds can be designed to work with each other (i.e., they can be screened for excessive overlap to ensure that a participant using multiple funds is diversifying effectively). A trend toward true participant selection eliminates all of these advantages. It also MAY expose the plan sponsor to greater fiduciary liability. That notwithstanding, the concept has enormous appeal to many sponsors that don't understand the underlying issues, so we may see it happen anyway.

That's a good logical question MoJo. Unfortunately, the IRS may not be concerned with logic. They might ask why the plan sponsor didn't negotiate a waiver of minimum from SB, or for the minimum to be satisfied at the plan level. Or conversely, they might not. We just don't know. Let me pose another question. In the scenario you present, let's assume that ML's brokerage charges are WAY above market costs, SB's are at or below market. All participants have availability of brokerage option, but small balance participants must pay exorbitant charges. This looks like a discriminatory benefit in favor of higher balance participants. It may also be a breach of fiduciary responsibility to make ML accounts available even though they charge exorbitant fees (my apologies to any ML folks reading this--this is an example only.) In the absence of clear regulatory guidance, I advise my clients offering brokerage options that they should offer one brokerage firm only, that the minimum account size should be low or waived, and that they should do some reasonable cost/service benchmarking. Some clients offer multiple brokerages anyway. I recommend that they benchmark each brokerage independently.

The consensus I'm aware of is that the brokerage account is a BRF. I know of one sponsor that does a coverage test on eligibility for brokerage, despite a relatively low minimum ($2,000). I'd be leery of info from the brokerage firm--many firms just don't understand the ERISA issues.

Yes. Right to contribute protected by ADEA.

Yes, there have been numerous recent instances of DoL challenges in the Kansas City region. There is an excellent article on the topic in the September/October issue of Profit Sharing, the magazine of the PSCA (www.psca.org). I'm not sure exactly how the DoL is enforcing excess payments. It may just be that they are requiring a make-good, although they may be calling the excess payment a prohibited transaction (since the DoL's position is that the employer should have paid the expense, thus benefitted from a cost reduction) which presumably would trigger excise taxes and penalties. I don't have any direct experience, although I have one client currently under DoL audit, and they appear to be focussing on fees. I'll be interested in the resolution of this audit.

I think responding to the IRS audit will be deemed a "settlor" function, which means it's a corporate responsibility. While you might be able to get an opinion to the contrary, it's likely that the opinion would be more costly than simply paying the response costs directly.

Assuming that you mean the annual CPA audit required, the answer is generally yes, but you may want to be aware of the DOL's position in the Kansas City region, discussed in other threads, which holds that all admin fees must be paid by the employer, or shared according to some reasonable formula.

There's no "typical" charge. It will depend on the complexity of the transition, size of the plan, need for custom programming for transfer data, etc. I've seen transition charges range from zero to tens of thousands of dollars. I agree with MR that participants should not be out of the market for more than 2-3 days max, and typically just 1 business day. Mapping strategies are one of the most important and complex elements of transition planning. Be careful to map to funds that are in fact similar, not to funds that have similar sounding names or objectives.

A typical black-out (by the way, I prefer the term "quiet period" runs about 4 weeks, +/- 2 weeks, so a 2-6 week transition period is common. Some vendors are now specializing in a no-black-out conversion. Most vendors would say that cash conversions are easier than in-kind, so a full liquidation doesn't save time, but not liquidating might take longer. And most conversions entail changing custodian, so again, I don't think that has an impact. Is your question pertaining to just a recordkeeper change? If so, it may be system dependent. I've seen a transition between two recordkeepers, both using TrustMark and both custodying through Schwab, with no asset sale, take less than a week. But if the recordkeepers are using different systems, it probably would take just as long to change recordkeepers as to change everything.

I had a client once that paid large annual bonuses early in the year. Participant received a $1million bonus off a non-system check. Payroll records indicated that the participant had elected to defer at a 10% rate, so they withheld and contributed $100,000 to the plan. We fixed that awfully quickly. General answer is that the entire 402(g) limit could be contributed with first payroll, unless there is a plan provision to the contrary (e.g. max percent of pay that can be contributed per pay period).

In this situation, I wouldn't worry about NASD rules, since the minor doesn't "own" his or her account, the plan owns the account. The broker/dealer has no "know your client" responsibilities for the individual plan participant, and ERISA would probably preempt such a concern, even if it did apply.

Beg to differ, and apologize for being conservative, but I think that the IRS would say that the participant's responsibility is to make a valid salary deferral election, and that the employer's responsibility is to implement the election. Since the employer failed to fulfill its responsibility, the employer should make up all missed deferrals, plus any applicable matching, plus investment earnings that would have been earned. I believe this is correctible within the APRSC standards, and there may even be an example in the regs (attorneys--comments or cites). From an internal control perspective, you may want to check how it is that the deferral elections weren't processed properly. Keypunch error? Improper internal review? The purpose is to ensure that this is an isolated instance, and isn't repeated.

To the extent that the decision to use proprietary product results from investment advice rendered by the insurance company, there is a violation of the ERISA prohibited transaction rules. So it depends how the dollars got to the insurance company products. Did participants choose the accounts on their own, or did the insurance company's advice steer them into the product? And be careful about the definition of "advice"--it's not obvious what is meant by that term. More information would be helpful.

From time to time, our firm acts as expert witness in ERISA litigation. With that background, I have a few comments. With regard to the first question, I doubt there's much recourse. The argument that you would need to make is that your wife's ability to manage her account was constrained by the lack of information that was provided, that consequently, her employer became responsible for managing the account, and that the employer's management was imprudent. It's unlikely that an argument like that would fly. Second, there is little if any litigation (so far) relating to black out periods. Third, a 70% allocation to growth stocks could easily lead to a 23% loss. Many funds with heavy tech orientations were down 40% plus during this period. Internet funds were down more than 80%. Without second guessing the original investment decision, I'd note that a 23% loss is not unreasonable, and it could have been much worse. Your fourth question has been addressed. But unless there is more going on here, I doubt the DOL will be of much help. Finally, there is nothing in ERISA specific to blackouts. Your most likely possibility is to use an ERISA 404©argument that you were not permitted to transfer at least quarterly, and that consequently, your wife's former employer became responsible for managing her account prudently, which they did not do. I'm not sure that this is likely to succeed, because the former employer continued your wife's existing investment instructions, and because a prudently managed portfolio could easily have lost 23% in the NASDAQ crash of March/April. Sorry to be such a downer. You may be able to find an attorney to take the case. But I doubt you would win anything, unless the former employer just wants to settle to make this go away.

According to HR Investment Consultants' 401(k) Provider Directory Averages Book, an average 2000 life plan with $60,000,000 in assets (the closest I could find to Kirk's scenario) incurs total annual plan costs of 1.09%, with a range from 0.48% to 2.56%. So Kirk's example is more than 50% higher than the high end of the range. With potential conflict of interest issues as well, it's my sense that the client should have taken Kirk's advice and reviewed the arrangement. At a minimum, they should have documentation in the file supporting the decision that they made.

Good question. I'd agree that in my experience, the vendors aren't dealing with it, and this could introduce 404© problems. As a plan consultant, I'll be interested in any comments from the vendor community.

The admin services are "free", in that the plan sponsor doesn't pay anything for them. Providing the service is still profitable for the vendor, in that the profitability on investment management makes up for the admin service that has been provided for free. Based on my understanding of the market, it appears that the "margin" on investment management is typically about 50 basis points (0.50%). Assuming an average account balance of $40,000, this translates to $200/participant of investment management margin available to subsidize admin costs. And it's not necessarily problematic if total investment management costs are reasonable. Where it becomes a problem is when the 50 basis points is layered on over and above a reasonable investment management fee. What's reasonable? That depends on the individual plan, and the services required. So is it "'free' admin services free, or merely free"? It depends how you look at it. I suggest simply that it can be misleading to look at admin costs in a vacuum, without considering investment management fees and possible subsidies.

While I agree with most of the responses, I'd suggest that to determine whether the aggregate level of fees is appropriate, you need to benchmark total plan costs (including investment management, trustee and administrative fees) against peer plans. Note that numerous surveys indicate that investment management charges, which are almost always paid by participants, typically represent about 90% of total plan costs. If total plan costs are reasonable, and investment management charges are below average, it's possible to communicate to employees why costs are being shared, what industry standard practices are, and why the plan is still a good benefit. Without a complete understanding of plan costs, this can be difficult. In terms of how plan costs are passed through, this varies by company, by type of provider, and by type of service. Most asset based charges (e.g. trustee fees) are allocated pro rata. Plan administrative charges (recordkeeping fees, compliance services, etc.) are charged through using both pro rata and by participant methods. Often, the provider's billing method dictates how these fees are charged through. Participant specific charges (e.g., loan administration) are typically charged to the participant. You may be interested in reviewing our article, "Managing Your 401(k) Plan Fees", on our website, http://www.schultzcollins.com. Select the "Qualified Plans" button. And finally, I'd disagree somewhat with Greg Judd's comments--we're seeing many provider's offering zero admin cost 401(k) plans. Of course, he's right on his other comment. Nothing's really free, so the admin service is paid for through higher investment management fees.

Here's an uncited but practical response. Assuming that the employee works a full day (or is fully paid) for Friday, they don't separate from service until Monday, the first day that they don't show up for work. This is after September 30, so they get the contribution. I've often adopted this approach where the Plan Year ends on December 31, which is a holiday for many companies, and employees are leaving to take a new job in the New Year. It just seems to me to be unreasonably punitive to not give the employee the benefit of the doubt when they don't clearly separate before the end of the year. Of course, as I said, this is an uncited practical interpretation. And it should be adopted uniformly (no giving "good" employees the benefit of the doubt, while penalizing "bad" employees. Others may have differing opinions. I'll be interested to follow the thread.

Although I'm not an auditor, I'd suggest it should be (a), and your sample should be large enough that even if you get some non-participants or non-eligibles, you still have a representative sample. Of course, if you get no contributors, you can always extend your sample. If you choose (B) or ©, you are not testing an important management control function.

In addressing why banks face fewer compliance issues when investing their own plan assets in mutual funds, as opposed to investing in separately managed accounts, PJK makes appropriate reference to PTCE 77-3 and 77-4. These exemptions generally permit financial services firms to invest in their own mutual funds, provided that the funds are offered on the best commercially available terms. Kirk, you may be pleased to note that similar exemptions apply to collective trust funds. However, since separately managed accounts typically have negotiated fees, it's impossible to know what the best commercially available terms are, hence the lack of a PT exemption. PT issues also drive one of the main problems with trustees receiving 12(B)1 fees (other issues have to do with NASD licensing, which aren't relevant to ERISA fiduciary conduct). It only applies when trustees provide investment advice (which they may do indirectly through the range of funds offered). The DOL spells out the issues pretty clearly in the "Frost" Advisory opinion letter 97-15A. Generally, the trustee can't use 12(B)1's to increase revenue, and the arrangement must be fully disclosed to the client.

Many thanks to Harry O, who accurately relates the problem I was initially trying to address, before we went off on a 410(B) coverage tangent. My recollection of work I did years ago on this topic is that without 415 eligible comp, a nonresident clearly is NOT permitted to make any annual additions. And my understanding is that "US source income" is required for 415 eligible comp, hence my short-cut reference back to "reportable on a W-2" (I recognize that that reference is imprecise, but I find it useful). I'll leave it up to Kirk, Phil and Harry to determine whether nonresident US citizens can have US source income while domiciled and working exclusively in another country.

Let me summarize, if I may, my understanding of Phil's last comments in the thread: 1) Expatriates and TCNs can/should continue to participate in the 401(k) plan, unless the plan provides that they don't participate. 2) They may be taxed by the foreign country on their contributions, employer contributions, and investment earnings. 3) The US employer probably can't deduct contributions made for these employees. If this understanding is correct, why wouldn't you want to exclude expats from the plan, and provide something more appropriate in the country that the expat works in? It seems as if all tax benefits are eliminated. My initial comment in the thread was not intended to indicate that I believed that the transferred employee had terminated employment. It was merely to indicate that they can't continue to contribute to the 401(k) while they are out of the country. In my experience, this is the policy adopted by most employers. But participants continue to accrue vesting service and continue to benefit from tax deferred investment earnings on the money already in the plan. While it's true that they don't receive matching contributions, the employer can make up for that by setting up a local plan. Finally, it seems that the sponsor considering these issues needs help from someone more qualified than me.[Edited by Jon Chambers on 08-11-2000 at 01:39 PM]

One other quick thought--it's possible that the small TPA checked a 5500 box representing that the audit was full scope, while the auditors legitimately conducted a limited scope audit. If this is the case, the plan sponsor would merely need to amend the 5500 filing to indicate that the attached audit opinion is limited scope, and the whole thing may be done.