What to do with problem investment in a self directed 401(k) plan?

[katieinny]

The employer is in the process of changing to a new trustee for the company's 401(k) plan. Prior to this change, employees were investing all over the map. For the most part, they've been able to transfer things over without too much difficulty, but there's one investment that the new trustee says they won't take on.

There are significant penalties if the participant liquidates the investment now. I suppose we could set up a separate trust for that investment, but I'm wondering if the participant can be forced to sell.

[Belgarath]

IMHO, the participant absolutely can be forced to sell. The investment is still owned by the Trustee of the plan, in spite of the fact that the participant has been allowed to direct where the Trustee invests the money.

The right to direct investments, or the right to a particular investment, is not a protected benefit. See 1.411(d)-4, Q&A-1(d).

Now, there may be an issue of fiduciary breach, where the Trustee/Plan Administrator allowed an investment that was too risky/didn't have sufficient liquidity, etc. - then sells it. The Trustee/Plan Administrator is still responsible for due diligence/prudence in the allowable investments, and while this may be mitigated if it is a 404© plan, it could get tricky. Especially depending upon the amount of money/loss, this one sounds like ERISA counsel should be called in.