401k Investment Choices

[DP]

We have a client who has provided his staff with an array of mutual funds for their PS/401k contributions. The owner of the business wants to invest his share of the contributions in stocks, bonds, etc, but doesn't want to give this option to the staff. In my mind this is discrimatory. Could someone provide me with a cite that will prove this is frowned upon by the IRS? Thanks.

[E as in ERISA]

Look at Regulations Section 1.401(a)(4)-4 re benefits, rights and features. In particular look at Regs Sec. 1.401(a)(4)-4(e)(3)(iii)© that indicates that the right to a particular form of investment is a right or feature (and therefore has to be made available on a nondiscriminatory basis).

[mbozek]

There is a solution if the owner meets certain requirements for withdrawal of the ps contributions under the plan and is over 59 1/2 for the 401(k) portion. The owner can withdraw the plan funds and do a tax free rollover to an IRA to invest in individual stock and bonds. The plan needs to have an inservice withdrawal provision but otherwise it is permitted. The other option is to set up a separate plan for the owner which would permit use of a greater degree of investment options but this could violate the BRF provisions because the owners plan would be aggregated for controlled group purposes.

[E as in ERISA]

When participants are considering moving assets to an IRA, I would also remind them (1) that an IRA may not have the protection from creditors that a qualified plan does and (2) loans cannot be taken from an IRA. (These are only factors to weigh in making the decision -- many times the investment options still weigh in favor of the IRA).

[Guest asire2002]

I am relatively certain that a plan was disqualified for the exact arrangement you are describing. I wish I could give you a cite.

[mbozek]

Asire: Are you referring to a withhdrawl of funds which is permitted under IRC or applicable regs? I don't think the IRS can disqualfiy a plan for allowing a withhdrawal which is permitted under applicable law regardless of the reason for the distribution.

[Guest asire2002]

Mzobek: No, I was referring to the practice of allowing only HCEs to invest in stocks, etc., while restricting NHCEs to mutual funds, inside of a qualified plan.

[Kirk Maldonado]

I'm not sure if this is what you are referring to, but I think that Private Letter Ruling 9137001 also reaches that result.