Jon Chambers

In general, I think you are ok with these facts. But let me give you a couple more things to worry about. Participant argues that selection of the fund in question is not made in the best interests of participants and beneficiaries, but is a quid pro quo for the contract. If the fund underperforms, participant alleges a breach of fiduciary conduct on fund selection. Best way to address this would be through the plan's IPS. If fund is selected and monitored in accordance with objective criteria, it's unlikely that the selection would be questioned. Additionally, if an unaffiliated and unconflicted advisor supports the fund selection decision, that would help significantly (see the terms of the settlement agreement in the First Union case).

There are no successful suits like the one you discuss (nor any unsuccessful ones that I'm aware of either). And given the way the fiduciary liability rules are structured, it's unlikely that such a suit would ever be filed. More likely (but I'm not aware of any actual suits) would be a class action alleging that the sponsor should never have offered a tech fund through the plan, because the option is inappropriate for the work force, and no one understood the risks implicit in the fund. The suits currently working through the industry generally have to do with self-dealing--either financial services companies offering their own proprietary funds through their plan, or companies encouraging employees to invest in stock of the company. These are generally class action, or seeking to be class action. Nothing is at the level of the individual participant, and frankly, the plaintiffs' attorneys don't want to take those cases, but the dollars involved are too small to justify the cost of litigation. We have acted as expert witness in some of these cases. I'd be happy to share comments and observations if you send me a private message.

There are lots of issues. How did you select the TPA? It could be argued that the decision to select the TPA was a "quid pro quo" for them using your funds, consequently, both plans may have breached their fiduciary duty to act solely in the interests of participants and beneficiaries. How did you go about deciding to use your own funds? How did you decide to custody your own funds? Do you have an Investment Policy Statement (IPS) guiding your fund and administrative selection process? If so, do your funds and selected TPA meet the IPS standards? Do you have an independent ficuciary supporting your fund selection and review process? On the surface, your fact pattern appears very similar to the First Union case, which resulted in a significant settlement paid to plan participants. Remember that the PTE permitting use of your own funds doesn't say that use of your own funds is per se prudent, merely that it is not strictly prohibited.

I agree that these are the possible scenarios, that's a better phrased description of what I was trying to lay out above. And I agree that the separate investment structure in the same trust is unlikely, but theoretically possible.

I don't have an answer for you, but I have a way to look at the problem. First, if the "new" plan is a continuation of the old plan, then it makes no sense to do independent 5500 reporting. The transfer happened within the corpus of a single trust, albeit to a different account and investment structure. In this event, Pay Chex should still be doing consolidated 5500 reporting that includes the assets you are concerned about. Second, if the transfer was to a separate trust NOT governed by Pay Chex, then you have a new plan with a transfer in of assets, and contribution activity. Opening balances are zero. Pay Chex has a transfer out from the multi-employer plan. But in this event, you either need to have a plan document and trust agreement for the new company and new trust, or authorization from Pay Chex to use the old document and some language about the relationship between the old trust and the new trust. Frankly, I doubt that this would work, although it's not impossible. In a nutshell, I believe you either have: 1) No new trust, hence no transfer and no independent reporting, or 2) A new plan and trust, consequently requirements for reporting and documentation. Hope this helps,

We run RFPs for larger plans, generally with bundled providers. We ask what caseload the administrator typically handles. The average seems to be 10-12 plans/administrator. This is probably about 25,000 participants and about $1 billion in assets, for rough numbers.

Here's a link to an overview of the trustee role, and why you may prefer to have an institutional trustee. FYI, we are consultants, and don't act as trustee, so there is no inherent bias in our opinions. http://www.advisorsquare.com/advisors/schu...ns/82713136.pdf

Yes. Any other questions?

This is not a safe harbor HSWD. Plan may not need to be amended if it permits both safe harbor and "facts and circumstances" hardships. But I don't see why paying down loans constitutes a hardship.

Qualifying event for HSWD would need to be threat of foreclosure on your home, leading to eviction. So, if you want to proceed with this course of action, you need the IRS to place a lien on your home, and to threaten to foreclose. HSWD will probably be subject to the 10% penalty tax. However, HSWD available amount can be grossed up for taxes due. Not sure why you want to default on your loans. This will only increase your tax burden with no incremental dollars to you. Also not sure you can electively default on your loan. Most loans are paid by payroll deduction. HSWD is generally not a good alternative, but if it's all you have available, you may want to take it. But if possible, pay back your loans, avoid additional taxes and penalties, and rebuild your retirement account.

No exceptions that I'm aware of. Your client almost certainly owes the penalty tax.

Due to other mandatory withholding, such as Social Security and employer paid healthcare premiums, employers aren't considering permitting 100% elections for 401(k) contributions. But some are considering permitting 80% or 90% elections. Personally, I'm in favor of 50%--it's still a lot, it's a nice round number, and it leaves plenty of room for other withholding.

They could be on an unpaid leave of absence--still an employee, not rendering services, consequently, not paid.

I'd say it's acceptable, provided that you are reasonably certain that the loan won't be accelerated due to a job change, layoff or corporate acquisition. But if you have any reasonable alternative to borrowing from the plan, you may be well served to take it. For example, when my wife and I bought our house (we're both in the retirement plan industry) and we didn't have enough saved for a 20% down payment, we decided to take out a second mortgage to supplement our savings, instead of borrowing from our retirement plans. Although the interest rate was higher on the second, it is deductible, and we have subsequently refinanced. We have managed to avoid double taxation, and we've kept our retirement assets growing. In summary, I'd say don't borrow from a loan shark instead of the plan, but if you have a reasonable alternative that provides for deductible interest, take it. If borrowing from the plan is the only way to get the house of your dreams, then borrow away and don't worry too much about the double taxation.

Thanks Harry! I knew someone would know the answer to this one.

Company A maintains 401(k) plan including employer securities. Many plan participants hold highly appreciated shares of Company A stock through the Plan. Company B acquires Company A, exchanges shares of Company B stock for shares of Company A stock, and amends Company A's plan to provide that the plan can hold Company B stock as the new employer security. Question 1: Is plan participant's net unrealized appreciation (NUA) in Company B stock determined based on the historical purchase cost of Company A stock that was exchanged for the Company B stock, or based on the acquisition price by Company B? Question 2: Assuming that NUA is based on historical purchase cost, can participants elect capital gains treatment on a future sale of Company B stock, assuming shares are distributed in-kind and are liquidated outside the plan? If yes, how long do they need to hold Company B stock to qualify for long term capital gains treatment?

And thank you for your cogent and well-considered commentary on double taxation. In general, I agree with you, at least as far as the principal payments, and your analogy of keeping loan proceeds in a drawer. I use a similar analogy--take a loan and immediately pay it back using the loan proceeds to pay off the loan. No double taxation. But I'm not sure I completely agree with your assumptions regarding loan interest. This is taxed twice. If the participant had not taken the loan from the plan, but had come up with a different financing source, he or she would (presumably) have earned more on their 401(k) plan account. Furthermore, if the alternate financing was in the form of a home equity loan, interest payments would be deductible. Let's assume that interest rates are equal for plan loans, home equity loans and the investments in the plan. I know this is unrealistic, but it keeps the comparison simple. In each case, repayment of principal, to the plan or to the bank, has no impact on wealth. You borrow money and pay it back. If you borrow from the plan, you earn less on your plan, but don't pay this interest to the bank. If you borrow from the bank, your interest payments to the bank are equal to the interest you earn on the amount you didn't borrow from the plan. Now let's consider the taxation on the interest payments. The plan loan interest is paid with after tax dollars, and is taxed again when it comes back to you. Double taxation. The bank loan interest is deductible, and doesn't come back to you. No taxation. One more thing to consider, however--you do earn more in the plan when you borrow from the bank, and these earnings eventually come back to you, so you implicitly face single taxation in the bank loan scenario. This is my take on double taxation. I think it's a valid observation, provided you understand it applies to interest payments only, when you have a tax-advantaged alternative borrowing mechanism, such as a home equity loan. I concur that many people simply spout "double taxation" without thinking through what they mean. I'd be interested in your thoughts on my analysis--it's certainly possible that I'm missing something here.

Double taxation occurs because the loan repayments come back to you (eventually) as a plan distribution, and they are taxed at that point. You never received any basis for your after-tax loan payments, so you paid twice. Granted, you received the loan as a non-taxable event. It's a greater issue on interest payments than on principal payments, if you compare a plan loan to an alternate financing source (e.g., a home equity loan). With a home equity loan, your payments don't come back to you, but at least you get a deduction for the interest you paid. Loans aren't necessarily the only investments earning positive returns. Most value stock funds are up more than 10% so far this year, real estate funds continue to do well and emerging markets are at least breaking even. Small cap stock funds are also generally up double digits so far this year, with the Russell 2000 up about 7% for the first 6 months. Bond funds have been doing extremely well for the past 18 months. Sure, tech stocks are down, but they are a relatively small segment of the market. More than 300 of the S&P 500 stocks were up in 2000; more than 250 were up more than 10%. Across the broad stock market, returns are much better than they were in 1998, when a few large cap growth stocks did very well, but most stocks were down. In my experience, well-diversified plan participants aren't experiencing losses, although gains aren't as large as they were a few years ago.

Owners can't have self-directed accounts that are not available to others, under the BRF rules. Assuming that the self-directed accounts were available to all employees, but only the owners elected to use them, I doubt you have much of a case. If self-directed accounts were not available to all employees, you may be able to argue that there were no self-directed accounts, just one big pool, and consequently gains from self-directed accounts should be shared with other employees, using the logic that the alternative is a disqualified plan. Hope this helps,

The Schedule P is the "Annual Return of Fiduciary of Employee Benefit Trust". It starts the statute of limitations running for the 5500 filing. It doesn't imply any real fiduciary liability for the trustee--the trustee's role is a function of the trust agreement and the trustee's engagement agreement with the plan sponsor. A passive trustee is generally not responsible for investments, but is still responsible for the safekeeping of assets. Depending on the agreements, even passive trustees may have some additional responsibilities. For example, if salary deferral contributions cease coming to the trust, and the trustee knows that the plan has not been terminated, they may have some responsibility to investigate why they are no longer receiving contributions. I think that the rules are pretty clear, unfortunately, terms are used interchangably, and different trustees accept different amounts of liability, so it is very difficult to say which trustees accept more or less liability based on terminology such as "passive" or "active". Clearly, the employer will be a fiduciary to the plan no matter what the trustee's role is. In my opinion, there is a hierarchy of liability shifting. When the trustee is active and fully discretionary, they take on the most liability. Where they are passive and non-discretionary (i.e., they do whatever the employer tells them to, without investigating, and nothing that the employer doesn't tell them to), they take on the least liability. There are an infinite number of variations in between. You may be interested in my article, Benefits of an Institutional Trustee, at our firm's website at http://www.schultzcollins.com/Advisors/schultzcollins/ Click on "Qualified Plans" to find the article. Finally, there is no reason that I am aware of for anyone other than a trustee to sign the Schedule P, even when the trustee is completely passive. Hope this helps,

I'd find out why the loan is being accelerated. I'd guess that the plan is being terminated as a result of the acquisition. In this case, his options are to pay off the loan, pay the taxes, or lobby someone to maintain the plan until he can pay off the loan. It's also possible, although highly unlikely, that he could be permitted to roll over the loan to the acquiring company's plan. Here's yet another example of why 401(k) plan loans are not the great deal that they appear to be. I actively discourage participants from taking loans due to double taxation, no deductibility of payments, loss of earnings on borrowed amount, and the potential for unexpected acceleration due to layoff, merger, etc. But plan loans remain very popular.

There is no standard approach--it depends on how your plans are drafted. What you describe makes sense, and is a relatively straightforward structure. Contributions to the deferred comp plan are no longer "compensation" and consequently aren't eligible to be contributed to the 401(k) plan. Many other deferred compensation plans don't kick in until after the 401(k) limit has been reached--either a % of pay, or the $10,500 402(g) limit. Be careful with your $250,000 example. Remember that in 2001, qualified plans can't consider comp in excess of $170,000. You are right to be sure you communicate the plans properly. I suggest referring specific questions to the people that helped draft your plans in the first place.

It's more common to charge for eligibles. Another variant is whether the provider charges for terminated participants with balances left in the plan. Frankly, I think it is most equitable if all three are charged, but at different rates, to reflect the amount of reconciliation, transaction and reporting responsibilities required to support the account. Even though you have to track eligible non-participants, it costs less to support them, since they don't get statements, don't make trades, and probably rarely call the VRS or call center.

Yes, the passive trustee should be listed on the Schedule P, and should sign it.

I work with several companies meeting that description, and I have a few observations. First, don't accept any C class funds--it should all be load waived A or true no-load. Second, matching contributions vary significantly. There is no industry standard. 50% match on first 6% is most common, but not a standard. Third, entry is rapid, generally immediate or first of quarter following date of hire. Finally, vesting is also rapid, often immediate, rarely more than 4 year graded. Hope this helps.