Investment Options & Discrimination Rules

[Guest cngriffin]

An employer wishes to set up a retirement plan with a large brokerage firm and the brokerage firm has different minimum investment limits for various perks. For example, the brokerage firms requires $20,000 to have a "personal advisor" assigned to that account. If the employer creates a retirement plan that uses this brokerage firm, will the employer runa afoul of the discrimination rules? Assuming that the plan itself is open to all employees, and all employees can invest with this brokerage firm, but the only difference being that higher paid employees will probably have the $20k to be able to obtain a personal advisor. The *type* of investment choices (i.e. mutual fund families etc) will be the same for everyone.

[mwyatt]

The IRS addressed this type of situation in the Gray Book from the 1999 Enrolled Actuaries Meeting.

The question dealt with a similar situation wherein a special brokerage feature was only available for a given account level. In the question, only HCEs had such balances. The questioner argued along similar lines that the brokerage firm was supplying the constraint, not the plan.

Unfortunately, the response was that there would definitely be issues with the Benefits, Rights, and Features of the 401(a)(4) regulations. (While the usual disclaimers applied in the Gray Book, the panelists included Jim Holland, Harlan Weller, and Dick Wickersham, all high level IRS representatives).

Here is Question #19 from the 1999 Gray Book (apologies if I'm breaking any copyright laws):

Q: An employer has a profit sharing plan with individually directed accounts at a major mutual fund house. The participants are all being given the option of electing to use an investment manager for their accounts if they so desire. The management fees would be paid directly from the participant's account.

Only the HCEs have account balances at the minimum amount necessary, as established by the investment manager, to be serviced by the manager. There is a concern that the use of investment managers by the HCEs would violate the benefits, rights and features requirements of the non-discrimination rules. Is this an issue?

A: Yes, there is an issue. If the option of using individually directed accounts is only effectively available to HCEs, the plan is in violation of the nondiscriminatory benefits, rights and features requirement.

[This message has been edited by mwyatt (edited 05-13-99).]