Loans as Pooled Investments

[Dougsbpc]

Suppose a profit sharing plan has pooled investments for all plan assets other than participant loans. Each participant who has an outstanding loan makes his/her payments to a savings account (earmarked account).

In late 2001, the plan committe and trustee decide to make all loans pooled investments (i.e. liquidate earmarked loan repayment accounts and transfer proceeds to the plan pooled account). The pooled investment return was -17% for the 2001-2002 year. Instead of earning 1.5% in the earmarked savings accounts, all participants with loans suffered 17% losses. Furthermore, the committe and trustee did not inform participants of the change to pooled loans. Now one participant claims he would have repaid his loan had he known the loans would be pooled.

The committe and trustee truely had the best intentions for all participants in mind when they made the decision. They felt that the pooled account (professionally managed) would produce a higher average investment return over a period of time than the earmarked savings accounts.

The plan is not subject to minimum funding and I believe the right to direct investments is not a 411(d)(6) protected benefit. Of course the committee should have informed participants, but is there any legal requirement to do so? Would this participant have recourse against the committe who are fiduciaries?

Thank you.

[mbozek]

What does the note or loan agreement say about the terms of repayment and the investment of the loan repayments? A Loan note is a contract and the plan is bound by its terms.

Also what does the plan document say about loans? Was the change to the pooled fund documented by an amendment to the plan? A change over to the pooled fund could be a material change in the plan which should have been disclosed to participants as a summary of material modifications, although I dont know what the claim is for the failure to disclose.

Finally I dont what is the relevance of the employee who would have repid the loan had he known that the funds would be placed in a fooled fund. The participant has a legal obligation to pay the loan off. Repayment doesnt have anything to do with how the funds are invested.

[Dougsbpc]

mbozek

Thanks for the reply.

The loan (note, statement of disclosure etc.) and SPD are silent on how loan repayments are invested. The plan document, however did indicate loans were direct investments of the plan. We provided the plan sponsor with a plan amendment that did change the language for loans to indicate they are now pooled investments of the plan.

This is a case where we provided information on treatment of pooled vs. earmarked loans and the client immediately moved the loans to the pooled account without informing us. We only dicovered it after reviewing a brokerage statement then immediately sent the amendment for them to execute. I wonder if the amendment is even valid since it was executed 5 days after the accounts were moved.