Prohibited Transaction?

[Guest reyeps]

My company currently administers our plan in-house but are bringing in a TPA to handle the plan in 2002. It is a privately held company.

The company is also rolling out a co-branded investment product with the same TPA in the coming months. Registered Investment Advisors will be able to sell this co-branded product to 401(k) plans; utilize the services of the TPA and offer our investment product. The investment product will utilize non-proprietary mutual funds, our company will be custodian of the assets and hold them in house accounts at each fund.

The TPA agreed to move custody of their own 401(k) assets to us and we in turn aggreed to move administration of our plan to them. We will maintain custody of our own plan assets. Any sub-TA, sub-accounting, 12b revenue, custodian fees, etc will be shared.

The TPA has waived all plan level fees, but did not waive participant level fees. The company is not going to pursue and outside legal opinion or private letter ruling.

On the surface, does anyone see any issues here? Thanks in advance for any feedback you provide.

[Jon Chambers]

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.

[Erik Read]

I think there's been a missunderstanding - the oringinal post says the funds are "non-proprietary" meaning - public Mutual funds - correct? In that case, the issue that I would raise is with regard to the 12b-1 fees and sub-T/A fees being kept by the custodian or shared with the TPA, for the plans belonging to either of those organizations - on the surface, I could argue that the company is then benefitting from the use of the plan assets.

Is the trail being used in leu of charging the plan for services? I think you'd be better off generating an invoice at least annually for services rendered - deducting the revenue trail, and then discounting to get to zero or rebating the balance to the plan.

Touchy area - for other plans being brought to the product - I don't see any issues, as long as the plan's fiduciary's have done their homework and due diligence on your firms.