ErnieG

Peter: I have interpreted a Fidicuay's duty of Prudence “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use…” 29 U.S.C. §1104(a)(1)(B) “circumstances then prevailing” to include participant characteristics, including their likely level of investment sophistication. Also, wouldn't we turn also to the DOL Interpretive Bulletin 96‑1 that fiduciaries must consider: “the investment experience and sophistication of the plan participants” when determining the adequacy of information and education provided. I believe this is not isolated to education but used when evaluating whether a lineup is prudently structured.

Peter: I don't see how a Plan Fiduciary can act for the "sole benefit" of the Plan participants and beneficiaries under ERISA §404(a)(1)(A) when choosing alternative investments as an investment option. Assuming procedural prudence has been used, and the Plan is intended to comply with ERISA §404(c) (which is not a shield), how is having alternative investments in an investment line-up for the "sole benefit" when participants typically lack sophistication, liquidity constraints can impair participant rights Fees, valuation, risk are harder to monitor, and disclosure requirements are more complex. “The prudence of a particular investment decision depends on the facts and circumstances… including the participants’ level of sophistication and the plan’s investment objectives.” [29 CFR §2550.404a‑1(b)(1)] My belief is this will raise the Fiduciary bar. While have alternatives in a QDIA, Target Date or Risk Adjusted Fund may lessen the risk, there remains the Plan Fiduciaries' process of choosing such Fund with alternatives as it relates to fees, performance, liquidity, etc. Plan Fiduciaries when considering this type of investment should be prepared to defend the choice considering, "...the participants’ level of sophistication and the plan’s investment objectives." This also assumes the Plan Fiduciaries have complete knowledge of these alternatives, or they have hired an expert.

This is all good until the first wave of lawsuits hits. Despite the "safe harbor" there remains the procedural prudence of why this type of investment is good for the rank-and-file not just the owners now have access to these investments with much lower thresholds to get in.

Kay

Lay: The client would need to obtain the Fair Market Value (FMV) of the life insurance policy to determine the value, which may or may not be the Cash Value. It may be the $620,000 or some other value based on the year-end FMV combined with the other assets.

Could not agree more. However, I believe we are going to see more issues as AI becomes more prevalent with the "do-it-yourselfers". We've referred a handful of cases over the past several months to ERISA Attorney's for correction of a host of issues when the "do-it-yourselfer", or their other "professional advisor", realizes there is an issue.

truphao: There is a bias against using life insurance however done correctly with professionals versed in such usage works well. I'm not clear on the "loss of money" considering some contract used in this market have high first year cash values (95% of premium), and as I had outlined earlier, there must be a need for life insurance protection (just a question of how are you paying for it). The life insurance may not be transferred to an IRA, and yes to purchase they individual would have to come up with the fair market value, but some strategies would be to take a loan on the policy to reduce the fair market value to a point that is workable for the individual. Also those professionals in using such strategies with life insurance plan for the distribution before the sale is made so the client is prepared for the exit strategy.

Yes provides an income tax free death benefit (face amount minus cash value assuming the participant reported and paid tax on the annual economic benefit). This assumes there is a life insurance need. Using permanent whole life insurance provides guarantees for the fixed return portion of the portfolio.

truphao, the life insurance carrier will provide both the Fair Market Valuation and the annual Economic Benefit Report. If the carrier is versed in using life insurance in a Qualified Plan both reports are generated and sent to the Plan Sponsor annually. Upon separation from service the life insurance generally can be surrendered, distributed, or purchased.

Unless you’re also in the business of providing tax or legal advice we only provide a recommendation to seek such professional counsel.

We're going through this now, the employer Plan Sponsor has a change of mind after signing the Plan Documents, no Trust Account established, no funding. It is our interpretation that a Plan is established based on our reading of guidance that we can find from the PGGC addressing Title IV, "A plan is covered … upon the date of establishment or the effective date, whichever is later. Thus, your plan is covered on the date of establishment, which is normally the date on which the plan documents are executed.” Although this applies to PBGC coverage we feel this is a good interpretation of when a Plan is established. Additionally, ERISA Section 402(a)(1) requires a plan be established and maintained under a written document. In this case since we do have a written Plan Document there is a Plan and therefore needs to be formally terminated. This may be an ultra-conservative view and would appreciate if anyone else has a different view.

This is a text book how not to. We design many of these especially now with gig and independent workers out there. It is not the plan that went south it’s the fact it did not have a TPA. We make it explicitly clear a TPA is needed from the start. The problem many vendors offer this type of Plan, offer a one-time Plan Document and that’s it. The issue also is with the “Google Advisor”—do it yourself, it’s cheaper.

Peter is on point. Usually, the insurance carrier prepares the PS 58 reports and forwards them to the employer. The employer then prepares the 1099-Rs. However, if the PS58 is not reported, taxes paid, the entire death benefit is taxable to the survivor. There is also no basis recovery.

The 100x rule is based on the projected monthly benefit at normal retirement age. Therefore, as the projected benefit increases so will the life insurance to maintain 100x's. If the projected monthly benefit is decreased, likewise, the life insurance would be decreased to maintain the 100x's and to remain incidental. You would also need to review the Plan Document and the life insurance carriers' limits regarding policy increases.

We provide both the tax deduction or the tax credits. We also caveat strongly the client needs to review the information with their tax and/or legal advisor.