Participant Received Distribution from Self-Directed Brokerage Window, Contrary to Plan Terms

[rocknrolls2]

Company X maintains a 401(k) plan for its employees, under which employees are permitted to direct the investment of their account balances among several pre-selected investment funds, called core funds, and have the ability to select from a universe of several thousamd mutual funds under a self-directed brokerage window. The plan document requires a participant to transfer that portion of his/her account invested in the brokerage window back to the core funds before taking a distribution. It was recently discovered that one participant, having terminated employment, requested a rollover of his/her account invested in the brokerage window to IRAs for which a mutual fund company was the custodian. The "rollover" was actually implemented by the vendor for the brokerage window. It appears that this was an isolated incident and that no other participant has been able to effect a rollover directly from the brokerage window. Short of making sure that the ability to "rollover" out of the brokerage window does not recur, how should the plan correct this error?

[J Simmons]

I think the plan trustees have a duty to try to retrieve the $$ back into a brokerage account titled in the name of the plan trust, back under control of the plan trustees.

The brokerage window vendor probably violated the terms of the agreement between it and the plan trustees when it permitted the $$ to leave a plan trust-titled acocunt and be transferred to the IRA. So the onus for fixing this ought to be on the brokerage window vendor, and working with the mutual fund custodian of the IRA and employee to do so.

The mutual fund custodian of the IRA where the $$ now is likely has an agreement with the employee, as IRA 'owner', not to transfer $$ out of that IRA without the employee's consent. So the employee is likely going to have to sign something for the mutual fund custodian of the IRA before it will transfer the $$ back into the plan trust-titled account.

Failure to keep control over the assets of the plan is a breach of fiduciary duty, and so the DoL's voluntary fiduciary correction program should be looked into to see if any notification or filing with the DoL may be necessary or advisable.

[J Simmons]

Does anyone know if in addition to the DoL's voluntary fiduciary correction program whether this situation needs to be fixed through EPCRS as well?

[PAL]

I'm also interested in knowing if anyone else had experienced this type of issue.

[david rigby]

The brokerage window vendor probably violated the terms of the agreement between it and the plan trustees ...

Start with this; review that agreement. (The Plan does have such agreement, doesn't it?) The Plan's ERISA counsel should be your first phone call.