403(b) plans and trustees

[Guest pinsall]

I have a 403(B) plan document that has individual Trustees named.

The account is a pooled investment account with a bank custodian.

I have a concern that 403(B) plan has named Trustees

Any thoughts on this?

The 403(B) in question is a church plan, although I don't think that changes the issues

Much thanks

Pat Insall

[IRC401]

403(B) assets may be invested in annuity contracts or mutual funds. If the assets are in a bank trust fund, you do not have a 403(B) plan.

Because there is no need for a trustee for a 403(B) plan, I wonder what other kinds of problems you might have.

[Carol V. Calhoun]

Actually, the mutual funds must be held in a custodial account, so as long as the bank custodial account you refer to does nothing but hold mutual fund shares, the custodial account should not have a problem. But it should not have named trustees. I'm wondering exactly what those named trustees do, in any event?

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Employee benefits legal resource site

[Guest PeterGulia]

It's possible that the plan's investment arrangement is an IRC 403(B)(9) retirement income account.

This form of 403(B) investment is available only to an otherwise eligible employer that is a church (or a convention of churches). However, the account may be used by the church's ministers, even those who are self-employed. IRC 404(a)(10); IRC 414(e)(5).

Unlike other forms of 403(B) investment, a church plan retirement income account may invest in almost anything. But if any plan, trust, or account in the pooled retirement income account is an IRC 401(a) trust, the retirement income account should be designed to preclude or provide restoration for "old-law" prohibited transactions. IRC 503.

Although not necessarily required, it's not uncommon for a church plan or its retirement income account to have "trustees", even sometimes when they do not act as trustees. Also, churches sometimes unwisely set up a retirement income account even when there is no investment reason to do so. On the other hand, a church might want the extra flexibility to do what it likes in the future.

A church plan or retirement income account is not subject to the federal Investment Company Act of 1940. 15 U.S.C. 80a-3©(14). However, the SEC may require the church plan administrator to file with the SEC a notice form and information prescribed by the SEC. 15 USC 80a-29(h). Church plan or retirement income account interests need not be registered under the federal Securities Act of 1933. 15 U.S.C. 77c(a)(13). Those who effect transactions in church plan or retirement income account interests do not thereby incur registration obligations under the Securities Exchange Act of 1934. 15 U.S.C. 78c(a)(12)(vi), 78c(g). But church plan and retirement income account interests are not excepted from the anti-fraud provisions of the securities laws. 15 U.S.C. 78c(a)(12)(A)(vi).

Finally, the church plan administrator must furnish written disclosure that "the [church] plan, or [sic] any company or account maintained to manage or hold plan assets and interests in [the church] plan, company, or account are not subject to registration, regulation or reporting under [the Investment Company Act of 1940], the Securities Act of 1933, the Securities Exchange Act of 1934, or State securities laws; and plan participant and beneficiaries therefore will not be afforded the protection of those provisions." 15 U.S.C. 80a-29(g). This disclosure must be furnished to a new participant "as soon as is practicable after joining [the] plan", and to all participants "not less frequently than annually".

The effect of failing to furnish the required disclosures is that the above-described exemptions and exceptions from the securities laws do not apply.

A trustee should satisfy himself or herself that he or she has received sound legal advice about the trust instrument and the applicable state law of trusts. Also, a prudent trustee might want a written legal opinion that the church plan and any retirement income account have put in place what's necessary to avoid the application of federal and state securities laws. Likewise, a person performing services regarding a plan might fairly ask for sensible assurances.

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