Non-leveraged vs. just investing in er securities

[Guest tas]

A client wants to invest their future match and ps contributions solely in non-publicly traded er securities. It is an "eligible individual account plan" and the prototype document expressly states that there is no limit. Just out of curiosity - what is the difference between this arrangement and a non-leveraged ESOP (which are normally placed on more "high maintenance" individually designed documents)?

Also, we've tried to warn them of the complexity and the need for good securities attorney to keep them out of trouble. Any other pieces of advice to dissuade (ah hem, I mean "inform") them regarding this decision?

[BeckyMiller]

If your client goes with an ESOP, it increases the rigidity of the rules - limits the nature of the securities that are qualifying, requires annual appraisal, requires diversification, requires put option, etc. It also may grant them additional tax incentives.

A well run individual account plan, however, is likely to look a lot like an ESOP. That is, face many of the same rigidities. They really should get an independent appraisal even though the law doesn't specifically require it. The law does require that the assets be restated annually to fair value. Your client probably needs to provide liquidity, even if they don't face the required put option or diversification standard. We recently picked up a plan that was dealing with a criminal investigation by the state attorney general for distributing non-traded securities out of a profit sharing plan, when there was no market for the stock.... (Elliot has set such a high standard of intervention for these guys!)

It is not an area that sponsors should enter casually. Not sure that I have been discouraging enough....