closed mutual funds

[k man]

one of the funds in a plan is closing to new investors. they will remain open to participants in the plan that are currently invested in that fund. this differs from the normal scenerio in that when a fund closes, it typically remains open to all participants in the plan even if one participant is not invested in the fund. do you think that the fact that some participants will have access to a certain fund while others will not presents a discrimination problem?

[alanm]

NO, as long as it was a decision made by the mutual fund company and not a plan fiduciary. However, I would add a like fund to the platform for others to have the same investment opportunity.

[TBob]

I don't know what type of RK platform you are on but I am curious to know how you will implement this in your RK systems? Every system that I worked with in the past will roll the trading up to at least the plan level. Most fund companies have no idea what participants are in the fund and what their balances are.

If you are on a system like this, will your system be able to restrict the future activity to just those that have a current balance? If a fund forced us to comply with this type of close, we would recommend to the trustee to remove the fund altogether and replace it.

[k man]

tbob, that is a valid point.

alanm, i am not sure it makes a difference who makes the decision. i think you have to look at the effect on participants.

[david rigby]

alanm, i am not sure it makes a difference who makes the decision.

Why not? If the decision is outside the plan, are you suggesting the plan sponsor may be subject to a claim of discrimination?

[ljr]

Does anyone out there have any ideas on how to implement the soon to be required restrictions?

I don't see how the plan sponsor can be liable for an action outside their control. I do strongly agree with the prior post about adding a similar investment option so all participants have access to a fund with at least very similar investment objectives.

From what I've been able to find out so far, the fund closing to new participant investors rather than at the plan level is the first time this has ever been done.

[Guest benefitsmom]

I think there is a discrimination problem. The right to invest in the fund (a "particular form of investment") is an "other right or feature" under Reg. Section 1.401(1)(4)-4(e)(3)(iii)©. Section 1.401(a)(4)-4 provides that rights and features provided under a plan are made available in a nondiscriminatory manner only if each right or feature satisfies the current availability requirement and the effective availability requirement.

The rules would permit the fund to be aggregated with another fund, but the new fund must be of inherently equal or greater value. Even if a similar fund is added, the new fund (which would be available to all participants and so could separately satisfy the current availability requirement) will not be of inherently equal or greater value than the the first fund because it is likely that, although the two funds are similar, their performances will crisscross. Thus, it will not be "impossible" "at any time and under any conditions" for any employee to receive a smaller amount or a less valuable right under the new fund than what the employee could have received under the first fund. Therefore, aggregating the two funds will not solve the problem.

There is a special testing rule at § 1.401(a)(4)-4(b)(3), but it pertains only with respect to benefits accrued (and future gains and losses) as of the elimination date.

[Jon Chambers]

Benefitsmom--while I follow your argument, if you are right, a significant portion of the nation's 401(k) plans will have a problem--the fund in question is a very popular fund operated by the country's leading 401(k) provider. I personally don't see as great an issue, since the fiduciaries that operate the plan are offering the fund in a non-discriminatory manner, although the fund provider has imposed restrictions that may, over time, become discriminatory, if, for example, there is more turnover among NHCEs than among HCEs.

It will be interesting to see how this plays out. My personal prediction is that at some point, the fund will reopen, and the point will become moot.

[mbozek]

Fund managers close funds for reasons that have nothing to do with discrimination in retirement plans, usually because the manager runs out of good investments. It should not have any effect on discrimination because the limitation on investments is not a decision made by the plan. Applying the BRF rules to closed funds puts qualified plans at a disadvantage with SEPS and other employer plans that hold assets IRAs which are not subject to the BRF rules.

[ljr]

mbozek - thanks for another of your common sense replies!

I'm still curious is anyone has figured out how to implement on recordkeeping a fund closing at the participant level?

[k man]

pax, if the plan is discriminatory it is because the rights and benefits are not available to participants in the manner the regs provide. who is responsible for the fund change is not material in my opinion because it always will come back to the plan sponsor.

[Brian Gallagher]

i would just close the fund to all the participants in the plan for future contributions and allow the people with money in the fund to keep it there or exchange out as they see fit. this way there's no problems.

[Jon Chambers]

My turn to be devil's advocate--in response to Brian's post, while closing the fund to all participants would eliminate discrimination issues, and would address recordkeeping challenges, is this really a prudent fiduciary course of action? The reason that the fund is closing is because it has performed well. It's well diversified, low cost, and well managed. Should the fund be closed to all participants simply because it's no longer possible to offer it to some participants? This seems like the tail wagging the dog. My take is that fiduciaries and recordkeepers should consider whether it's possible to keep the fund open, factoring in operational and compliance issues. If it is possible, and the fund is a prudent choice, keep offering the fund. If the operational or compliance issues are overwhelming, remove it.

I have about a half dozen clients that offer the fund, all with the fund company serving as recordkeeper. The fund company will administer the "semi-hard" close. I'm advising clients to keep the fund, while selecting a similar fund to offer to all participants, such that new participants, or participants that don't currently own the fund, have access to the fund's asset class and investment style.

[Belgarath]

I'm going to climb up on my soapbox a bit here, although I think I'm preaching to the choir. The IRS has really gone over the edge on this BRF issue. They put the plan fiduciary in a very difficult position. As Jon Chambers correctly notes - surrendering a good investment, while avoiding potential nondiscrimination issues, raises other issues of fiduciary responsibilities. A good investment should not be forced to be liquidated because the IRS has stepped beyond the bounds of common sense. For plans with individual accounts, there is no reason why a mutual fund/investment company shouldn't be able to make additional options available to larger accounts. The NHC with the smaller account isn't being "denied" anything that would otherwise be available - and if their account ever reaches the requisite minimum, they can enjoy the additional features as well.

Revenue Ruling 2004-21 is yet another example of this being taken to extremes. While issued to legitimately curb some gross abuses, (that needed to be curbed!) it also sweeps legitimate, nonabusive situations into the net.

A mutual fund allowing additional investment options for accounts over a certain level, while not providing them to small accounts where such services would represent a financial loss, or insurance companies refusing to issue a certain policy type below a minimum face/premium amount, should not be BRF violations!

[Guest benefitsmom]

http://reish.com/publications/article_deta...m?ARTICLEID=456

This is a link to an article from today's Benefitslink Retirement Plans Newsletter that deals with this issue.