How about this one...is it prohibited?Soft-dollars in collective funds where <25% of investors are retirement plan assets

[Guest Lebowski]

I recently learned about section 4975 (prohibited transactions) and am curious to find out if there is any case law or formal guidance on the definition of "Plan assets" as mentioned under the section. This gets complicated, but I'm hopeful...

Hypothetical Scenario:

Plan participant X who has his IRA or 401(k) account with a "plan administrator" as defined by ERISA directs that plan administrator to send an investment to a common investment fund (specifically, a Limited Partnership operating as an investment company, but exempt from the ICA 1940 due to the number of investors, and issuing interests therein exempt from registration with the SEC by compliance with Reg D of the '33 Act).

So my questions are:

1) In this scenario, I understand tht ERISA(US Dept of Labor) does not generally term a collective investement fund as a "Plan" until such collective investment fund has at least 25% of its capital as IRA, 401(k), ERISA plan or other similar types of accounts. Is this correct?

2) In the scenario above, does the IRS agree with ERISA in its determination of what makes a collective fund "plan assets"? i.e. does IRS allow exemptions from section 4975 in a collective fund if less than 25% of invested capital is from such retirement-type accounts?

[Ron Snyder]

Plan asset regulations are located at:

Plan Asset Regulations

IRS is required to defer to DOL in those areas of the law where DOL has primary jurisdiction (ERISA), but not where there are specific provisions of the Internal Revenue Code, such as 4975.

The issue is not whether or not a "collective investement (sp) fund" is a "Plan", or whether such funds are from "retirement-type accounts" but whether there a transaction is a prohibited transaction, and the rules are slightly different between ERISA 406-408 and IRC 4975. Your scenario does not give enough specifics to judge whether it would be a PT.

Is the transaction a sale or exchange of property between the Plan and a party-in-interest/disqualified person? How much of the investment will the plan own? Who are the other owners? Are there any other relationships between the plan, any PII/DP and the other owners of or investors in the fund? And is this transaction simply an attempt to circumvent the PT rules by using other entities?

[Guest Lebowski]

The transactions referred to are securities trades for the common investment fund. The scenario is this (there's also a good deal of soft language and conjecture on the DOL and SEC sites):

"Soft Dollars" are a reference to a situation where a disqualified party (The investment manager - who is the Gen. Partner providing services to the partnership) places trades through various brokers (Very large registered broker-dealers) when buying or selling securities for the fund. Commissions are paid for the transactions. The broker-dealers provide their high-volume customers with other goods and services in exchange for doing business with them, and therefore the commissions paid are interpreted to be in excess of the fair value of the services rendered. THese other goods and services can be things such as:

- Research.

- Office space at a reduced or at no rent.

- Access to the broker-dealer's Proprietary Software (trading, data, etc.)

- Other similar services.

The grey area is that clearly some of these services help the disqualified party to provide better services to the fund, but some are clearly a violation of the spirit of section 4975.

The question is: Can an IRA account be invested at all in such an account? Section 4975 uses the word "Plan" a lot, but gives no specifics as to whether or not Limited Partnerships automatically are considered to be a "Plan" or part thereof simply by accepting the investment of a small amount of IRA or other funds which are part of an actual "Plan". The partnerships referred to otherwise satisfy Section 408-2(b)2 as the plan trustee is an entity separate from the common investment fund. That is, the TPA is the trustee and administers self-directed plans.

I question it because DOL does not consider such an arrangement to be a "Plan" until the common fund's capital is comprised of at least 25% of ERISA plan assets. Once that threshold is reached, the common investment fund itself is automatically considered to be a "Plan" by DOL.

Also - I noticed from your website that you set up plans for employers, etc. Can you tell me what the typical startup and ongoing costs are to administer a "Plan" through a TPA?

Let me know if I'm not phrasing this well....

Thank you,