One plan purchasing an investment from another

[Dougsbpc]

An Employer sponsors a Defined Benefit plan and 401(k) Profit Sharing Plan. Each plan has its own trust. The profit sharing portion of the 401(k) has had pooled investments. The 401(k) Profit Sharing Plan is in the process of changing investment providers and making all accounts (including profit sharing) self-directed.

The pooled profit sharing account contains an investment worth $35,000 that cannot be liquidated. Generally, we would recommend that the sole key employee (100% owner) accept this investment as part of his account to be transferred. However, his entire account balance is only $10,000. This would be a perfect investment for their defined benefit plan. Could the defined benefit plan purchase this investment for the current fair market value? This would be the perfect solution.

Thanks.

[KJohnson]

Actually, if you track through the statute and regs the plans are--generally-- not parties in interest to each other just because they have the same plan sponsor. So, I don't think you have a 406(a) prohibited transaction quesiton. The real question is a 406(B)(2) question as to who is going to be making the decision on each side of the transaction? Buyers and sellers are typically "adverse" even in the most friendly of transactions.

I have heard of such situations in a multiemployer fund context involving a Board of the same 4 trustees sitting on 2 different funds. For the selling fund, two vote to sell while the other two abstain. On the other side of the transaction the other two Trustees vote to buy the asset while the two voting for the selling fund abstain.

I have never, myself, done a thorough analysis of this from a 406(B) standpoint. Of course, even if this works, there are fiduciary considerations to both buying and selling the asset apart from the prohibited transaction considerations.

Also, if you have one plan providing services to another plan in some sort of services sharing arrangement, the plans may, in fact, be parties in interest to each other.

[Kirk Maldonado]

I think that there should be at least one independent fiduciary involved in this situation.

[KJohnson]

I agree with Kirk that an independent fiduciary would be the best course, but for a $35,000 asset you may spend about 1/4 or more of it for his or her services.

[E as in ERISA]

And remember that the independent fiduciary may decide that this investment is not "perfect" for the plan.

[Dougsbpc]

Thanks for the replies KJohnson, Kirk, and Katherine.

In this case, the 100% shareholder is the trustee on both plans. He offered all 10 other participants the opportunity to share this investment on a pooled basis and has had no takers.

It is true that appointing an independent fiduciary would be very costly. It seems to me that the only other alternative then would be to force all participants (all those who already declined) to share this investment on a pooled basis.

Although the type of plan is irrelevent, benefits in a defined benefit plan are independent of investment performance. Therefore, no participant (other than the 100% shareholder) could be affected if the DB plan purchased the investment and it lost value. On the other hand, DC plan participants could complain if the investment did extrodinarily well. However, they were offered the opportunity to share in the investment.