Jon Chambers

In conducting many recordkeeper searches, I find that some of the plan sponsor's most common objectives are to reduce recordkeeping costs that are paid by the sponsor, to shift administrative responsibilities from the plan sponsor to the recordkeeper, or to shift costs from the sponsor to the plan participants. Since these scenarios clearly benefit the settlor, but don't necessarily benefit the participant, I think that the settlor should pay the cost. Certainly, there may be other examples and other conclusions, and, at the end of the day, it may be a facts and circumstances determination. But since the cost of a vendor search is not huge (generally, sponsors reduce their annual recordkeeping cost by significantly more than the cost of conducting the search), why run the risk of committing a fiduciary breach? That's my opinion on the issue anyway, I respect the opinions of those who disagree.

HR Investment Consultants maintains some useful survey data, for plans of various different sizes. Their address is: http://www.401ksource.com/

I agree that there are differences of opinions regarding the topic. One school of thought holds that setting the plan up is a settlor function, while maintaining it isn't. Using this rationale, an initial fund search should not be paid for with plan assets, while a search for a replacement fund to take the place of a prudently selected fund that, for whatever reason, is no longer desirable, would be o.k. Personally, I take the conservative position that recordkeeper searches should never be paid for with plan assets. This is because the recordkeeper primarily serves the plan sponsor, so selection of this provider is a settlor responsibility. I understand that reasonable people disagree with this conclusion, and that the DOL has not opined definitively either way. One thing to watch out for is search "consultants" that also accept finders fees or other compensation from plan providers. If the consultant is a fiduciary, takes fees from the plan, and also accepts compensation from a provider, it certainly would look like a conflict of interest and possible PT.

I'd suggest that there is no single standard for determining appropriate asset management fees. It depends on account structure (retail mutual fund, institutional mutual fund, separate account, etc.) and amount of money to be invested. If the funds to be invested are in excess of $100 million, and are invested in separate accounts, the figures you cite seem reasonable. I'm not aware of any definitive website that could support or refute this contention, or of any general rule of thumb similar to what you report. If you really want an answer, buy the Greenwich Associates money manager survey, that includes some detailed fee information, but be prepared to spend a few thousand dollars for the survey. Hope this helps,

rcline 46, as you probably know, there is a prohibited transaction class exemption that permits fund companies to offer their own funds through their own plan. However, the PTE doesn't get the company past the general 404(a) requirement. We did some consulting work on the First Union case; FU kept citing the PTE, but ended up settling (in part, and in my opinion) because it wasn't clear that their fund selection protocol satisfied the 404(a) requirement. New York Life is currently making similar points in their current case. My read of the term "proprietary" is that they are managed by the consulting firm, but the plan in question is not the consulting firm's plan. k man, is that read correct? In this case, there are probably no direct prohibited transactions to be concerned with, unless the consulting firm is acting in some other fiduciary capacity (e.g. trustee or investment advisor) and is recommending the use of their own investment funds. Thus, the issue gets back to k man's original question, which is whether the sponsor is responsible for monitoring the funds, even though the consulting firm is monitoring the investment managers (presumably subadvisors) that are managing fund assets. And the answer is almost certainly yes, unless there is some unusual additional relationship, with the consulting firm acting as a QPAM. Of course, if the consulting firm is a QPAM receiving fees, then they are an investment fiduciary, and their use of the related funds would probably be a prohibited transaction, absent any other exemption.

rcline46, while I don't disagree with your cites, I believe that they go to general prudence of fund selection, which is a 404(a) issue, not a 404© issue. And whether or not the proprietary funds are prudent goes to the facts and circumstances of the selection of the individual fund company and funds. Consider a plan using all Vanguard proprietary funds, and selecting index funds. You could have Vanguard's S&P 500 Index, small cap index, international index, and a very low cost money market. Based on the cost, diversification and market replication of the funds, it would be almost impossible to argue that they were imprudent selections, yet they would all be proprietary Vanguard funds. On the other hand, it would be almost impossible to come up with a prudent line-up of First Hand funds (First Hand is a fund company offering only technology and Internet sector funds). I'm reasonably familiar with Fred's handout, and personally I know him reasonably well. I don't believe he takes the position that an all proprietary line-up is necessarily wrong. He just says that the line-up must be selected and monitored in a prudent manner.

Assuming that the well-known consulting firm is not acting as a QPAM, then clearly the sponsor still has monitoring responsibilities. In the unlikely event that the consulting firm is acting as a QPAM, and meets the other ERISA requirements for a designated IM, then possibly the sponsor would be responsible solely for monitoring the consulting firm's activities (I know of at least one ERISA atty that takes this position). I'm not sure why proprietary funds can't get 404© protection--I'd love to here more supporting that assertion.

A plan must have at least one "named fiduciary". This is usually the plan administrator, although occasionally it is the trustee (generally where the trustee has investment discretion). Some plan service providers will attempt to gain a strategic advantage by agreeing to act as the "named fiduciary". Naive sponsors think this mitigates their liability. I disagree with this conclusion, since the plan sponsor hires the plan service provider, and consequently has control over the "named fiduciary".

What if any plans do you have for growth? If you intend to stay the same size, it probably doesn't matter, I'd go with the 401(k) for the reasons that Tom notes. If you will add just a few employees, the simpler plans may be better, because they are simpler. If you intend to grow even more (say 20+ employees), the advantages of a 401(k) will be even more apparent. Note that under EGTRRA (the new tax act taking effect in 2002), the advantages of the 401(k) are even greater than under current law. For various technical reasons, I believe that 401 plans (like a 401(k) are materially superior to 408 plans (like SIMPLE IRAs and SEP IRAs). If the cost difference is marginal, go with the better program.

RCK is correct. I was meaning to go back and make a plan document comment. My scenario only works if the document provides for both "deemed" and other HSWD.

Not generally (at least not under the deemed hardship rules). However, one exception might be that an employee could take a HSWD without taking a loan first, if they could demonstrate that taking a plan loan would compound the hardship. For example, a mortgage lender might say that if the participant took out a plan loan that they had to repay through payroll deduction, they wouldn't have enough remaining income to qualify for required mortgage. In this scenario, the participant could take the HSWD without taking the loan first, since taking the loan would prevent them from even qualifying to buy the house. The HSWD is then not a deemed hardship, but a hardship as determined and approved by the Committee.

I'm just reporting what I heard. The way the PSCA guy positioned it was that since the issue was unclear, the PSCA had asked DOL and IRS for clarifying guidance, and that the response was that none would be forthcoming. It's pretty clear that as far as PSCA was concerned, there is no blanket exemption, and hence the issue is unclear. But their point was that it is likely that the industry's operational practices will be accepted to the extent that they don't obviously conflict with the law. If noone in the industry provides GLB notices, and the notices aren't definitively required, it is highly unlikely that everyone will be determined to be in violation of the law. Their argument, not mine, but it seemed reasonable enough. Then again, I'm not an attorney. I'd follow up with PSCA (www.psca.org) if you have more questions.

At a PSCA conference in San Jose yesterday, they indicated that it is likely, but not certain, that retirement plans are exempt from the requirement. Rationale was that GLLB is intended to apply to retail relationships, and retirement plans generally aren't classified as retail arrangements (I'm paraphrasing here). They indicated that neither DOL nor IRS intend to issue clarifying regs. They recommended that vendors sit tight for now, and do nothing, and see how things develop.

From memory, it is 6 years from filing of a Schedule P. And of course, there are exceptions for fraud, etc.

While the name of the fund manager may be relevant information, I don't believe that it is required information under 404©. DOL regs make it clear that the fund manager is not a fiduciary to the plan, which he or she would be if they were a "designated investment manager". Similarly, DOL regs provide that fund holdings are not plan assets. So, my prior advice stands, unless I'm told otherwise.

That requirement really only applies to separately managed accounts. It's not the mutual fund manager, and not the RIA. I'd simply list the funds offered, and consider that part of the disclosure done.

My read on the new legislation is that transfers from the MPP to the 457 would be permitted in 2002, including a trustee to trustee transfer of the participant after-tax contributions. That begs the question as to whether the 457 plan provider can support an after-tax account, from both an administrative systems and plan document perspective. But the legal side seems pretty clear, assuming George W. signs the bill.

Yes, yes, and also consider filing under the DOL's voluntary fiduciary correction program (VFC).

Yes, this type of arrangement is not uncommon, and I have seen it several times. The qualified arrangement does not generally offset the maximum under the non-qualified 457 arrangement, although there could be 402(g) issues if the 4% employee contribution were pre-tax (you indicated it isn't in this case). There also may be 415 issues, but I kind of doubt it given the contribution rates you describe. Finally, the district should look for a longer term way out of the back-loaded annuity contracts, perhaps by freezing the current investments, offering a no-load future contribution option, and revisiting the decision when loads no longer apply. It's one thing to be held hostage to a provider for a while, it's another to be held hostage forever.

I'll answer anecdotally. I've seen about a half dozen financial services plans, including Franklin-Templeton, Merrill Lynch and Morgan Stanley Dean Witter. Generally, the financial services plans offer proprietary funds, some offer one or two outside funds. All plans I've seen offer a subset of funds, not the entire line-up. I've had significant ongoing conversations with plaintiff's attorneys in both the First Union and New York Life lawsuits, and based on those conversations, I would expect more litigation relating to financial services plans, perhaps lots more. If I were a financial services plan sponsor, I would make sure that I had an independent consultant help with fund selection, and that I could document that outside funds had at least been considered. The current lever seems to be that it is a breach of fiduciary duty to only consider proprietary funds.

Are the withdrawals only used to pay fees for the 401(k)account, and are they paid directly to the advisor? If so, I'd assume that they are plan expenses, and that there is no taxable event to the participant. Of course, the fee wouuld not be a deductible investment expense for the participant, since the fee comes from a tax-deferred source. If the withdrawal is used to pay fees on other accounts, or if the participant accepts the funds and then pays them to the advisor, you might reach a different conclusion.

To answer your question, it would be helpful to know why you believe you have a prohibited transaction that requires an exemption.

At the risk of seeming glib, that's like asking what are the engineering issues in building a nuclear power plant. If your spin off is large, I suggest you engage a qualified consultant to help you through the process. There are numerous investment issues, tax qualification issues, employee communications issues, reporting issues, systems issues, etc.

Without necessarily agreeing or disagreeing, I would observe that the large bundled providers have established a de facto standard by using trade confirmations as a mechanism for complying with the 404© requirement for written confirmation of instructions. Although a plain English reading would support a different conclusion, there may be a "generally accepted practice" standard that suggests that trade confirmations are how most providers satisfy this requirement. With the majority of investment instructions now provided over the web, it would be interesting to know the current definition of "written". Is electronic writing sufficient? I'm not aware of any section in ERISA, other than 404©, that requires trade confirmations.

Just visited site, above, and it's under construction, but you can call or e-mail (from the site) for a brochure.