Terminated EEs and Self-directed Accounts

[Guest BarryK]

An ER terminated 3 of his EEs. All 3 had vested balances in the company 401kPSP (a 404c compliant plan) in excess of $5,000. All 3 EEs declined to roll their assets out of the plan, instead those assets are held in an interest bearing account. Does the Trustee of the plan have to continue to permit those 3 former employees to direct the investment of their accounts?

[rcline46]

Can you say ABSOLUTELY!!!

By placing them in an interest bearing account he has:

violated the participant direction procedures by liquidating before the participants request funds; and

remove 404© protection for that portion of the plan by acting as trustee; and

subjected himself to a lawsuit for poor investing.

[mbozek]

Why not charge all terminated ees a fees for the cost of maintaining their account- at least the plan would break even and if they dont like it they can withdraw their funds.

[Bird]

I wouldn't say that the trustee HAS to permit them to continue to self-direct, although I think it's dumb not to.

That is, it's not a discrimination issue, since that is "tested" separately for all terminees, so unless there are term'd HCEs who are allowed to self-direct, it's OK.

But then the trustee is responsible for investing the accounts in a prudent manner, and investing in an interest-bearing account probably isn't, unless distribution is imminent.

I see nothing to gain by taking these participants out of self-direction. If it's a fee issue, then as noted, they can charge them (with proper disclosure in the SPD).

[mbozek]

Preventing former employees from self directing investments would be considered a significant detriment imposed on a participant who does not consent to a distribution in violation of IRC 411(a)(11). Reg. 1.411(a)(11)-11©(2). The failure to provide equal investment opportunties to former participants would result in not obtaining a valid consent to a distribution as required under the IRC. Rev. Rul 96-47.

[Bird]

Rev. Rul 96-47

Good cite; I'll modify my answer to say, yes, he HAS to allow them to self-direct.