Jon Chambers

I agree with KJohnson. Let's use Berkshire Hathaway stock (A) as an example. The last trade was at $63,600/share. A large balance participant purchasing Berkshire Hathaway through an SDBA is highly unlikely to be deemed to be exercising a BRF that is not available to other participants, provided that the other participants have access to the SDBA, and can purchase other securities.

And, for whatever it's worth, I know of at least one large plan sponsor, with a moderate SDBA minimum account size ($2,000), that does annual 410(B) testing to demonstrate that the SDBA BRF is effectively available to a non-discriminatory classification of participants, even though the SDBAs are in fact used disproportionately by HCEs.

I'd guess the second argument is the one that would be more difficult to overcome. It's unlikely that the direct cost savings outweigh the direct costs of properly accounting for a master trust. Of course, if those master trust accounting costs have not been incurred in the past, you get back to the various liability issues raised previously.

MBozek is correct that this is a "master trust" as the term is described on (among other places) the 5500 instructions. I have had some very limited experience with master trust accounting, and the experience I had suggests it should be avoided if at all possible. Some of the implications for the 5500 alone (from memory): direct filing requirements with DOL for master trust, separate audits for plans and master trust itself, non-standard (and somewhat convoluted) reporting for plan assets held through master trust. I'm sure others can add additional disadvantages. What are the arguments in favor of using the single brokerage account?

I do quite a bit of consulting on this topic, and I have to say that I agree with KJohnson. One brief observation--there are plenty of competent SDBA providers that impose a minimum of $1,000 or $2,000, so if there ever were a conflict on this topic, I believe it would be difficult for the fiduciaries to justify the selection of an SDBA provider that imposed a $10,000+ minimum.

Hi Pete. You raise some interesting points. I checked back on the opinion, and found the following relevant summary from The Groom Law Group: "SunAmerica originally applied for its own individual exemption. In issuing the advisory opinion, however, the Department concluded that the proposed structure would not involve a per se prohibited transaction, if in fact the investment services are performed by the unaffiliated financial expert hired by SunAmerica, by using computer software developed by persons unaffiliated with SunAmerica, or by a combination of the two. SunAmerica is not free to deviate from the decisions of the financial expert, and it must not be in a position improperly to "influence" those decisions. Under these circumstances, even though it will be marketing the investment services as its own and will accept fiduciary responsibility for them, the Department agreed that SunAmerica would not be "acting" as a fiduciary in a way that could generate higher fees for itself and its affiliates, and so would not be engaged in a prohibited transaction. The Department further noted, however, that this does not relieve SunAmerica of its fiduciary responsibility for the initial selection and ongoing monitoring of the financial expert's services." So, it seems you are right--under the letter, Ibbotson is a fiduciary, and SunAmerica is not. Unless, of course, the SunAmerica (or other brokerage) representative "influences" the participant's decision. Gosh! I can't imagine that happening. I've never known a broker attempt to influence a participant's investment decision, and certainly never with the intent to "generate higher fees for itself and its affiliates". ;-)) While I see your point as to the distinction between fund selection recommendations and asset allocation recommendations, I believe both impact the trustee's revenues. Asset allocation recommendations that direct more assets to high revenue share funds could have just as great an impact on revenue as changing to fund selections. Still, the whole thing is somewhat ambiguous until we get some real case law on the topic. One of the other points made by Groom was that, "It is widely believed that some exemption applications were made for "marketing" purposes as much as any concern over potential prohibited transactions." I can't imagine that financial services firms would stoop to such low levels--can you?

For some perspective, Vanguard's lifestyle funds (called LifeStrategy funds) (which are funds of Vanguard funds) have a weighted average expense ratio of approximately 30 basis points (0.30%), and no additional fund level fee. Fidelity's lifestyle funds (called Freedom funds) have a weighted average expense ratio of approximately 70-80 basis points, plus an additional 8 basis point fee. Frank Russell offers lifestyle funds (called LifePoints funds) in various share classes. Underlying expense ratios are approximately 70-80 basis points, plus an additional fee of up to 100 basis points as a service fee (commission) to the entity distributing the fund. Other fund companies offer significantly more expensive lifestyle funds. By definition, lifestyle funds are not customized for the individual participant. In general, fees for creating customized individual portfolios by a credible independent investment advisor run approximately 100 basis points, depending on the size of the account. This illustrates the small account problem. Someone with a $5,000 balance would generate a $50 annual fee--insufficient for most advisors to support an individual relationship. So most credible independent investment advisors don't offer across the board services to all plan participants, but are only willing to work with larger balance participants. Some new investment advisory entities are willing to work with all participants. I'm not sure how they price their services.

That's essentially my point. If you think about how the economic incentives work under SunAmerica, it's clear that an advisor would be biased in favor of higher equity exposure--this would generate higher fees now (since equity funds tend to have higher expense ratios than fixed income funds) and higher fees later (since more equities presumably means a higher expected rate of return). However, the advice to increase equity exposure may not be appropriate for the participant. If my hypothesis is correct, and if SunAmerica had been adopted and utilized in the mid-late '90s, many participants that relied on conflicted advice would be even worse off than they were with no advice.

I think the advisor's compensation should be fixed for the advice (as Frost presumes), not variable based on the advice (as SunAmerica permits). Despite the various constructs under SunAmerica designed to protect the objectivity of the advice (advice must be based on a model developed by an independent provider, relationship can't drive more than 5% of independent provider's revenues, etc.), if advice drives future revenues, there will always be an incentive for the user of the advice program to skew the advice to increase their own revenues. I know most advisors are ethical, and most advisors would do their best to be objective, but some wouldn't. I'm similarly concerned that the least ethical advisors would pursue conflicted advice the most aggressively, as they would generate more revenue than the truly objective advisor. Since ERISA is designed to protect participants, I think it should protect all participants. And I think SunAmerica represents a possible erosion of ERISA's protections.

I agree that the SunAmerica opinion directly conflicts with the Frost opinion. I surmise that DOL is attempting to make it easier to provide advice, by softening the requirements for providing advice. I'll refrain from giving my opinion as to whether or not this is a favorable development.

OK, now we are getting really close to agreement. I have one final question: How could a prudent plan sponsor or other fiduciary "deem an investment option unsuitable" without doing any due diligence on the option? I guess they could not accept ANY assets from any other plan. But if they accept some, but not others, and do no due diligence, it strikes me that they would be acting in an arbitrary and capricious manner.

Going back to my post, I never stated an opinion as to whether the decision to eliminate the investment was a fiduciary or settlor action; I merely indicated that it would be prudent to treat it as a fiduciary decision, since in the current environment, the DOL, plaintiff's counsel and others are taking expansive positions regarding the scope of fiduciary duties. See, for example, the First Union litigation (settled for $26 million), the SBC/Air Touch case, and Allison v. Bank One - Denver. Being right is sole consolation if it costs tens of thousands in legal defense costs to prove your point. In fact, my opinion is that removing an investment option is a fiduciary act. I'm not going to argue case law, other than to say that everyone has a right to an opinion. You argued, by analogy, that since a plan termination (a settlor act) could remove all investment options, then a plan sponsor could remove any investment options within the scope of its settlor functions. But the analogy doesn't work, because in a plan termination, participants would have a right to a distribution, and could (presumably) continue their investment outside the plan. I agree that the acquiring company could have simply terminated the acquired company's plan and eliminated all investment options within the scope of its settlor functions. This route has timing and coverage implications that I won't go into here. I believe the original question stated that the plan's were being merged, and Katherine's reply stated that in this instance, fiduciaries of the acquiring company had a duty to consider the prudence of eliminating the option. In my opinion, Katherine's response was entirely correct. The funny thing about this thread is that no one seems to disagree with the basic answer to the question. Sure, you can eliminate the investment. I agree that the risk of doing so is minimal. But I further believe that advising anyone that this is a settlor function, rather than a fiduciary function, is an aggressive and potentially dangerous interpretation of the law.

I have to say I agree with the last sentence of mbozek's original post. The comment applies equally to his opinions. Whether or not a participant wins a fiduciary lawsuit is probably not the issue. Nobody wins in a lawsuit, except possibly the lawyers. Forget about citing case law and regulations--we're in a new environment now, after Enron and numerous other cases. We're working in a litigation support capacity in several other cases that don't involve company stock. I agree with Katherine that cautious, prudent conduct is called for. If the employer can document and explain the rationale underlying the decision to remove the investment, I agree that potential liability is very small. Nonetheless, I recommend ensuring that a prudent process is followed, even if that costs some money.

Yes. Most hedge funds are almost completely unregulated, and many are organized offshore. There is no way to force hedge funds to comply with any requirements, so the government just left them out of the requirement.

The number of funds offered is greater than is normally offered through most similarly sized plan. Given the size of the population, I'm surprised that there wasn't greater focus on cost control, as the funds are primarily retail mutual funds. It appears that numerous entities (e.g. Prudential, VALIC, Nationwide) are acting as marketers, and may be demanding significant revenue share in order to support enrollment functions, etc. While it should be possible to construct an effective portfolio from the choices offered through the plan, the State of Florida should have been able to do a better job on the list. The marketing piece seems well done. It's a little light on disclosure. I'm intrigued by how fund fees are presented--it's a unique approach, that illustrates costs. I'd suggest that the projected accumulations over 10 years, including downside result, average result and upside result, are likely to be misunderstood. I'm sure they are based on Monte Carlo simulation, mean-variance optimization, or some other sophisticated technique (I didn't review closely enough to see what they did), but I can virtually guarantee that one of the funds will perform worse than the "downside result" over the next ten years, and someone will have some explaining to do. I wouldn't use that explanatory approach. Just my 2 cents. Anyone else have thoughts?

I agree with Bill's comment. Under the Kansas City office's earlier opinion, ALL expenses had to be allocated between the plan and the sponsor, since KC DoL was taking the position that the sponsor benefited from the plan's qualification. Absent distinct policy, they presumed a 50-50 cost allocation. Clearly, this position was in conflict with earlier national office opinions, and IRS interpretations. Now that KC has moved off their bizarre interpretation, I agree that the costs of responding to an IRS audit can be charged to the plan.

I agree with your first point. Your logic notwithstanding, many passive trustees use a trust agreement replete with indemnifications, and almost absolute repudiation of responsibility. The plan sponsor then faces the potential problem of reconciling the law and the terms of the agreement in the face of litigation. My general preference is to go with a trustee whose trust agreement accepts the non-delegable responsibilities that should typically reside with the trustee, such that there is no question as to what the plan sponsor should expect from the trustee. With regard to arbitration, that point was raised by MBozek. I believe he was referring to the fact that Schwab's brokerage and custody agreement mandates arbitration in any dispute. I don't believe that Schwab's trust agreement contains such language. I also agree that the arbitration requirement could not be binding on a participant who didn't agree to it. MBozek may want to comment further on this issue, as I may have misconstrued his intent.

KJ-- To address your question, there are many corporate trustees that accept designation as trustee, and require indemnifications from the corporation sponsoring the plan that cover them if they don't meet the ERISA requirements that you cite. They are the "trustee", in the sense that they are named as trustee, they sign the Schedule P, the plan can get a limited scope audit, etc., but they do not take on most of the responsibilities and liabilities that are normally associated with the trustee. In the plans I work with, no other individual or organization acts as co-trustee when an institution serves as passive trustee. MJB-- A custodian is not a trustee. If Schwab signs the Schedule P as a custodian, we presume they are a custodian. If they sign it as trustee, we presume they are a trustee. To be absolutely sure, you need to see if they were appropriately appointed by the Board, and whether they accepted the appointment by action of an officer of the trust company. Schwab's trust company is careful to ensure that documentation is properly executed. I doubt that Schwab or any other trustee, passive or active, can require arbitration in an ERISA case. They normally require significant indemnifications when they act as a directed trustee--see above. Other trustees require even more indemnifications than Schwab. Assessing the degree of responsibility accepted by a trustee is one of the services offered by a plan consultant that helps companies select bundled service providers.

The general consensus in the retirement consulting community is that under the new law, 401(k) plans (incorporating other features such as PS or match) offer more potential than other competing DC arrangements for the self employed individual seeking to maximize tax deferred contributions. Other than Pioneer, I'm not aware of bundled providers actively marketing turnkey solutions in this market. As I previously indicated, there may well be others, as I'm not particularly active in the very small 401(k) market.

Here's a link to one prototype provider that is marketing these plans. Disclaimer--I have no experience with either the provider or the concept of sole proprietor 401(k)s, so do your own due diligence. http://www.pioneerfunds.com/uni_k/home.jhtml

Thanks Kirk. To clarify further your clarification, these senior executive "black out" periods are often tied to the company's earnings reporting cycle. There is a period of time during which the company is preparing its earnings reports that it is highly likely that senior executives will have more or better information regarding the company's quarterly earnings report than investors in general. During these periods, executives are prohibited from trading, whether or not they have access to material non-public information.

Years ago, the consulting firm I worked for developed creative acronyms. Then, SMART stood for Save Money And Reduce Taxes (a typical 401(k)). My favorite was developed for Marineworld--SAFARI--Savings Accumulate For Additional Retirement Income. I think I saw an article in IOMA on the Benartzi concept, but I don't have any data or direct client experience.

I believe the Nortel plan had a unitized company stock fund, that permitted next day settlement--not truly a mutual fund, but not exactly company stock either. And I believe there was a story in the WSJ that indicated that the termination was due to unauthorized trading on Nortel stock inside the plan. It's not at all uncommon to have periods during which section 16b insiders are not permitted to trade, although other participants are allowed to trade.

Hey mjb-- Slow down a little here. I never said that a trustee has to have investment discretion, or needs to be responsible for a plan's investments. In fact, most trustees don't have that role or responsibility, because it is retained by the sponsor, or delegated to an investment manager. I merely said that a trustee is, by definition, a fiduciary. I then cited the ERISA reg that says that a trustee is a fiduciary. This whole conversation started because we were investigating whether or not a margin loan would be a prohibited transaction, a question that comes under the purview of the DOL. You may be right that courts don't care about DOL regs, and that they will adopt a functional definition of fiduciary status that is entirely dependent on whether or not the entity holds investment discretion. That doesn't change the fact that the DOL says a trustee is a fiduciary by definition, that just about every professional trustee will accept limited scope designation as a fiduciary, and that loans from fiduciaries may constitute a PT, absent an exemption. Are we in agreement on those points? If so, I don't think there is anything we disagree on.

I finally found the right cite as to whether a trustee must be a fiduciary. It's found in 29CFR Sec. 2509.75-8. Here's the relevant info. "D-3 Q: Does a person automatically become a fiduciary with respect to a plan by reason of holding certain positions in the administration of such plan? A: Some offices or positions of an employee benefit plan by their very nature require persons who hold them to perform one or more of the functions described in section 3(21)(A) of the Act. For example, a plan administrator or a trustee of a plan must, be the very nature of his position, have ``discretionary authority or discretionary responsibility in the administration'' of the plan within the meaning of section 3(21)(A)(iii) of the Act. Persons who hold such positions will therefore be fiduciaries." Hope this puts to bed the question of whether you can be a trustee without being a fiduciary. On the issue of range of trustee responsibilities, and the Metz case cited above, note the following conflicting conclusion from a Kilpatrick and Stockton article http://www.kilstock.com/site/print/detail?...rticle_Id=1031: "In Arakelian v. National Western Life Insurance Co., [755 F. Supp. 1080 (D.D.C. 1990)], the trustees argued that they were not fiduciaries because they had never exercised their fiduciary powers and had delegated plan administration to the insurance company from which they had purchased a group annuity contract. The court held that "[t]he fact that all administrative functions of the Plan were delegated to the Plan administrator (National Western) did not and does not absolve the trustees of their duty to review and insure that the administrator was acting in the best interests of the participants." [id. at 1084]"