Group Trust with Formerly Related Employers

[Guest Harry O]

Big Co. owns 65% of JV Co. Big Co. and JV Co. both maintain separate 401(k) plans but both plans participate in a master, group trust sponsored by Big. Co. for its affiliates (including JV Co.) where assets are tracked separately but combined for investment purposes. The master trust is therefore a group trust under Rev. Rul. 80-100. Both 401(k) plans allow participant-directed investments.

Big Co. sells all of its interest in JV Co. in March. Big Co. proposes to amend master trust to allow JV Co. 401(k) plan to stay in trust until December to allow smooth transition to new trustee, etc. JV Co. must leave the master trust by 12/31.

I have heard that this somehow creates problems under the securities laws but nothing specific has been articulated. Has anyone ever looked at something like this -- separate employers (although formerly related), separate plans but a single trust?

[jpod]

I'm guessing, but it may be that there was an exemption from registration under the Investment Company Act of 1940 that was available to the master/group trust while the two employers were affiliated, but may no longer be available. On the other hand, I know that there is at least one exemption from the 40 Act that is available to many/most 81-100 trusts whose participating plans are plans of several unrelated employers.

There may also be a 33 Act registration/exemption issue given that the plans are self-directed (i.e., an exemption that was available while the employers are affiliated, but is no longer available).

Chances are all of the above has already occurred to you, but if not, maybe this is helpful.

[Kirk Maldonado]

The exemption from the registration requirements in the 1933 Act generally does not apply to multiple employer plans. This problem arises whether or not the accounts in the plan are self-directed.

[Guest mab]

Kirk,

Could you explain your last sentence further? Tx.

[Kirk Maldonado]

There is a special exemption from the registration requirement under federal securities laws that applies to single employer plans but not to multiple employer plans. Thus, multiple employer plans can't use that exemption, even if the plan's administrative committee directed all of the investments.