Jon Chambers

As Phil noted, the DOL challenge goes to the appropriateness of the scope of the audit. As such, the inquiry is directed more to the audit, as an attachment to the 5500, than to the 5500 itself. Consequently, I'd suggest having the big audit firm generate the reply. As an aside, having worked for a (then) Big 6 firm, if a full scope audit is required, there's no way it can be turned around in 45 days. So at a minimum, the audit firm will need to negotiate an extension with the DOL.

Phil, although I'm aware of the non-resident alien exclusion for 410(B) purposes, my primary comment went to the definition of "compensation". If the transferred employee receives no U.S. compensation, then there is nothing to defer from. Perhaps they still count as a "participant" with a zero contribution. But my sense of the original question was whether or not the UK employee could contribute to a US 401(k), and I believe the answer to that is "no", unless there is US source income. I'd be interested in any cites to the contrary.

Generally, no. The only exception may be if they have "US source income". This would be indicated if their compensation continues to be reported on a W-2.

The accounting firm issued a limited scope opinion, which should be fine. Why did the DOL reject the filing? And what do you mean by "reject"? Typically, they just ask for a correction. You shouldn't be too worried about liability issues. First, it's probably not a big problem anyway. Second, it predates your involvement. Third, if the Investment Policy Statement or other document allocates responsibility for compliance functions, such as the Form 5500 filing, to the mutual fund company, then your liability is effectively zero (as investment advisors, we always include this language in the IPS we draft).

Suggest you take a look at a paper on this topic that is available in PDF form on our web site http://www.schultzcollins.com. Go to the "Corporate Retirement Plans-Articles" tab and click on the link to "Managing the 401(k) Vendor Selection Process.

Although there are no samples there, you might be interested in our website, which has a couple of articles on Defined Contribution Plan Investment Policy Statements (IPS). The articles are in PDF format. The first article addresses why policy is important, why it is often ignored, and what elements should be included. The second article addresses how to use an IPS to select investment options. The articles are under the Corporate Retirement Plans articles tab at http://www.schultzcollins.com.

You can't retroactively amend after the benefit accrues. And the benefit accrued when the participant satisfied all requirements to receive the allocation. So you have to follow the terms of the plan for the current forfeiture allocation. Of course, you can amend the plan prospectively. I understand how you feel about allocating forfeitures to participants who didn't elect to defer. In this circumstance, the plan should have been drafted to indicate that forfeitures would either offset or increment matching contributions. Incidentally, for technical reasons, there is no such thing as "a 401(k) plan with the profit sharing add on", it's "a profit sharing plan with a 401(k) add on." (The Internal Revenue Code doesn't recognize 401(k) PLANS, only 401(k) FEATURES of profit sharing plans.)

OK, I understand what you mean by "separate accounts". I usually use the term "separately managed accounts", or "private accounts", to differentiate from insurance company separate accounts. And it's useful to know that the plan has both these accounts and brokerage accounts. With a separately managed account, to get daily valuation, someone must unitize the account (i.e., convert participant interest in the pooled account into a synthetic share that will fluctuate in value daily). Most managers don't unitize their own accounts. This can be costly. I've seen $10,000/year/account quoted for this service. In terms of a recordkeeper recommendation, for this size plan I'd suggest contacting Milliman & Robertson. I'm familiar with their Dallas and Seattle offices, both of which could provide the functionality you are looking for. Other M&R offices probably have similar functionality, and may be closer to you. Assuming that you have brokerage accounts at multiple broker/dealers, other prospective providers might include United Missouri Bank (UMB) and City National. Finally, at the risk of sounding self serving (this is one of our primary services), you may want to consider engaging a consultant to help with the search. Not only would they identify appropriate providers, but they can help differentiate between proposals, assess the quality of each vendor and help negotiate fees.

By separate accounts, do you mean brokerage accounts? If so, where are the brokerage accounts? This could be a problematic scenario. I'd love to help, but need more info.

The real problem is the self-directed brokerage account, through TD Waterhouse, or through anyone else. First, the cashiering function (process of splitting deferrals to individual employee accounts) is much more complex in a self-directed brokerage account than it is in a more typical pooled investment option. Companies that wire funds typically make an omnibus purchase for all employees in the same investment option. This is often on pay date. It's not uncommon for employees with brokerage accounts to find that it takes an extra 5 - 10 days before funds are deposited to their individual accounts. Let's assume your 5 day estimate is correct for your company. Your contributions go to a money market fund, which in today's environment, earns about 5% per year. So, take your $250 contribution, times 5%/year, times (5 days/365 days) = $0.17 each time your contribution is late. Over 26 pay periods, you "lose" $4.51 per year. The real problem is the low return on uninvested funds in a brokerage account. Funds don't get invested until you elect to deposit them. Instead they go to the money market. You probably only trade your $250 contribution to purchase a mutual fund every couple of months, after you amass $1000 or so. Given that a mutual fund may earn 10%+/year, the 5% differential between the the mutual fund and the money market for up to a couple of months DOES add up to some real money. I'd suggest that you should lobby to replace the brokerage accounts with a more appropriate pooled fund structure.

Bundled and TPA are just labels. Bundled simply means a combination of services. In this case, it sounds like a bundle, but not a complete bundle. Having a bundled provider doesn't mean you won't use other service providers, such as investment consultants or testing specialists. All larger plans have independent auditors. Perhaps the distinction is that bundled providers offer a relatively static set of services that encompass all or most operational elements, while non-bundled providers (which might include TPAs) offer a more flexible package that will require other providers to complete the service package. Fiduciary rules are independent of the service provider. I'm somewhat of a contrarian, in that I believe using a bundled provider may expose the sponsor to greater fiduciary liability than an unbundled arrangement, because the investment choice (a primary fiduciary element) is intrinsically tied to the administrative service component. In any case, it's important to review and understand the service contract with any provider. In most cases, the sponsor retains effectively all fiduciary responsibility. Some trustee responsibilities can be outsourced, but beware the typical non-discretionary trustee agreement--the trustee typically accepts almost no responsibility. Hope this helps,

By using the term "prohibited transaction", I may have oversimplified in my earlier post. In the 404© regs [2550.404c-1(d)(2)(ii)(D)], there is a provision that 404© protection does not extend to investments that could result in a loss greater than the participant's total account balance. Such a loss is possible in a margined account. Permitting such an investment may represent a breach of fiduciary duty. If the participant experiences a loss greater than their aggregate account balance, someone will need to make the account whole--probably the fiduciary permitting the breach in the first place. This "guarantee" is unatractive for most fiduciaries, and could lead to prohibited transactions, whereby the make-good contribution is prohibited, but the linkage isn't necessarily direct. Thus, I agree with Kirk's clarification of my position. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

The other issue is that buying on margin could cause a loss greater than the value of the account, which also makes it a prohibited transaction. The quick answer is no buying on margin. This one is pretty clear. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

I'd recommend against using such a form. Although I'm not aware of any case law or cites, I don't believe that you can legally waive rights under ERISA. There are other techniques for managing fiduciary liability for brokerage accounts. Suggest you review that specific thread. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

Sounds right to me. Someone needs to be taxed when the loan accelerates, and the beneficiary is the natural party. Assume participant borrows $50,000, doesn't spend it, and dies before making any payments. Further assume that the beneficiary is the participant's sole heir. The beneficiary inherits the $50,000 that's in the deceased's checking account, tax free (assuming no estate taxes apply). Thus, the $50,000 has never been taxed. But then the loan isn't repayed, so is reported as a taxable distribution. Hence, a 1099-R is issued, and taxed to the beneficiary. FYI, this is merely a logical flow without any review of the regs. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

Alternately, if there are any no-load funds available through the plan, the participant could change investment elections to direct loan repayments to an unloaded fund. In more general terms, I agree with bzorc. There is no reason to be paying loads in a qualified plan in today's environment. In fact, it's probably a breach of cost control responsibility on the part of the fiduciaries to permit participants to be paying loads. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

Generally, forfeitures are valued as of the date of reallocation. So if funds have a loss, less forfeitures are reallocated, if a gain, more are reallocated. The sponsor is not required to make good on the reallocation. In practice, some recordkeepers transfer the non-vested portion of the account to a money market fund following distribution of the vested portion, to make it easier to track and value the forfeited amounts that are pending reallocation. This procedure seems to make sense to me. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

You need to treat former participants uniformly with current participants. Otherwise, it looks like a "force-out" designed to circumvent the rules against requiring distributions of accounts greater than $5,000. IRS frowns on techniques such as differential expense charges, or restricting investment selections for former employees. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

Kirk, we've had a bull market and a strong economy for years. Fiduciary lawsuits don't generally stem from relative underperformance (although they could and probably should). Lawsuits may mushroom when markets drop, firms layoff large numbers of employees, new jobs are hard to come by, and retirement savings don't offer the cushion that the unemployable former participants had hoped would be available. In a culture of blame, when times get tough, disgruntled former participants will be looking for someone to bail them out. I don't know how the courts will interpret 404©, but it would be crazy not to add the required disclaimer to an SPD. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

OK, it seems that people want opinions. So here I go: Do I think PBA's are a good idea? No. They take a participant's opportunity to invest in an institutional manner, and convert it back to a retail account. Do I think PBA's are popular and here to stay? Yes. There is a vocal minority of participants who want this level of control, and believe it is appropriate for their own accounts. We typically see 5% - 10% of participants opening PBA's. In my opinion, offering a PBA is preferable to confusing the core menu with dozens of excess funds requested by vocal participants. Do I think the fiduciary issues surrounding PBA's are manageable. Yes. I'm not in the camp that believes PBA's absolve the sponsor of responsibility. This is an oversimplification. I'm not in the camp that believes PBA's bring on huge potential liability. This requires an interpretation of the 404© regs that I believe will be unlikely. And my sense of the "new" litigation (SBC, First Union, et al) is that it's targeted at perceived fiduciary abuses, not at a lack of paternalism. So I'm not too worried about litigation IF the PBA's are managed appropriately. Do I recommend PBA's for clients? It depends on the individual clients' circumstances. For some companies, PBA's are an important enhancement to the plan. For others, they are an enormous pain. Our objective is merely to see that they are designed and administered properly, in the context of the plan's overall investment program. Do I recommend that the sponsor perform a "suitability overview"? No. Although I think this would be a good idea, and would help the participant, it's my contention that conducting a review exposes the sponsor to MORE liability than not conducting the review. Finally, I agree with MoJo that managed accounts are more likely to be successful over the long run than PBA's. But that doesn't mean that participants share my belief. Optimistic participants think they've found the next Cisco, and want to concentrate their investments to take advantage of their insight. Maybe they are correct (but probably not). In today's environment, I don't believe we need to stop them from trying (although we may want to dissuade them, by carefully explaining the risks that they are choosing to take). ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

If you want the 404© protection, you absolutely need to include the statement. It's typically incorporated into the SPD, and also in investment information brochures. Here is some typical language: "The XYZ Profit Sharing and 401(k) Plans are participant directed individual account retirement plans, as defined by Section 404© of the Employee Retirement Income Security Act of 1974, as amended (ERISA) and Section 2550.404©-1 of Title 29 of the Code of Federal Regulations. Under Section 404©, Plan Participants and beneficiaries are generally deemed to be responsible for the results of their investment decisions, and fiduciaries of the plan may be relieved of liability for any losses which result from investment instructions provided by Plan Participants and beneficiaries." Hope this helps. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

With regards to bflynn's comments: I agree that there is a significant opportunity for providing advice on individual brokerage accounts. A qualified advisor has the ability to play an important role when the advice is not constrained by a brief menu of fund choices. For various fiduciary reasons that I won't go into here, it's preferable that the advisor be a "QPAM" (qualified professional asset manager--check the regs) However, companies that "invite in" advisors, and/or pay a portion of the cost become co-fiduciaries responsible for the advisor's recommendations. In my experience, companies rarely want to take on that liability. With regards to tschenk's comments: I don't believe that a suitability determination is required, or should even be attempted. The whole purpose of self-direction is to take the employer out of the investment decision-making process. An employer that made suitability based recommendations would lose the 404© protection, and would probably violate securities laws, because they would be providing advice without any background or licensing in investments. With regards to MoJo's comments: I believe that the regs are pretty clear that 404© protection extends to brokerage accounts, and that the information requirement does not extend to providing data on every potential alternative. In numerous areas, the regs refer to brokerage accounts, and how they comply, but they also set up numerous potential hurdles that need to be considered. The whole process is tricky, but if handled properly, with prudent selection of the brokerage provider, reasonable trading restrictions, and an appropriately structured Investment Policy Statement, the potential fiduciary liability issues are manageable. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

A plan with no NHCE's is deemed to pass. It's also almost certainly super top-heavy. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

There's no definite time limit. The employer must merely act prudently. And, of course, the employer can't ever receive and hold the terminated plan's funds. Many employees misunderstand plan terminations. Termination simply means no more contributions. Funds generally stay invested as they were prior to the termination. Do you suspect some manipulation or mishandling of funds? More information would be helpful. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004

Yes on down payment, yes on closing costs, probably not on construction costs (not clearly relating to purchase) ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004