CUSTODIAL ACCOUNTS 403(B)(7)

[Guest djaszi]

Question: Can a bank or trust company[with valid trust or custodial powers and otherwise meeting the requirements of 408(n)] establish a custodial account to hold mutual funds as a vehicle for the 403(B) plan, or does the custodial account need to be established and maintained by a registered investment company?

Analysis:

Under Code Section 403(B)(7), a qualified employer/sponsor may establish a "custodial account for regulated investment company stock" to provide a valid vehicle for maintaining

investments (in mutual funds) under the

403(B) plan. The custodial account is required to satisfy the provisions of

Section 401(f)(2).

Code Section 401(f)(2) and definitions under the regulations, indicate that the custodian may be a bank under 408(n). Thus, it would seem clear that a bank or trust company which meets the 408(n) definition can be the custodian and hold the mutual fund assets.

My only misgiving about this conclusion is that I have not seen this done in practice, at least where the bank (or trust company) was not affiliated with any mutual fund (i.e., a captive trust company of a mutual fund family).

Please indicate if you agree. Thanks

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michael

[Guest RMassa]

Michael:

I do not believe there is any requirement that a 403(B)(7) custodian have a "captive" arrangement with the Investment Company with which 403(B) account assets will be invested. In example, broker/dealer firms Merrill Lynch and PaineWebber each maintain their own 403(B)(7) programs for which they are the custodian. Although these firms do have their own proprietary fund families, you are permitted to invest your 403(B) contributions in the shares of other, non-proprietary fund families. Therefore, if you can meet the appropriate requirements to become a custodian, you should be able to establish a 403(B)(7) custodial account program which you can market.

[This message has been edited by RMassa (edited 02-09-99).]

[Guest PeterGulia]

All that is required is that the 403(B)(7) custodian is a bank or trust company.

Several providers offer 403(B)(7) custodial accounts that can permit investment in hundreds or even thousands of mutual funds.

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[Guest djaszi]

Have you seen a bank establish a pooled custodial account arrangement to hold mutual funds in a 403(B) arrangement (as opposed to a broker or an insurance company)?

Clearly, a bank qualifies as a custodian under the Code. My concern is that a bank that establishes a pooled account to hold 403(B) assets, would thereby be pooling the individual custodial accounts, if each participant's mutual fund holdings were themselves deemed to be custodial accounts. This could unwitting create a common or collective trust which would be subject to additional rules under the Code and banking law.

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michael