Asset transfer

[pmacduff]

I'm here on this lovely Friday to beat the proverbial dead horse. I have tried the search feature and per my usual ineptness, couldn't find what I wanted. Here's the story...

401(k) profit sharing plan with approx. 245 participants, plan assets are transferring from one investment provider to another. The "old" assets have 2 GIC accounts that will have a market value adjustment upon transfer of approximately $8,000.

There are approx 25 participants (of the 245) in these accounts and of those, about 3 to5 participants with the bulk of the $$ who will have the largest mva. Of course, you all know that one of the 3 to 5 with the largest balance in the GICs is the owner. (I haven't looked yet, but I suspect the others are also HCs, but not key).

The Company wants to pay the $8,000 to "make the participants whole". I know that this isn't allowed.

Is there any way for this client to do this and still remain within the confines of the Code?

Thanks in advance.

[Bird]

Any such deposits would be contributions and subject to the terms of the plan's allocation formula as well as testing, if not a safe harbor type allocation. It's not absolutely impossible but highly unlikely given the facts you presented.

It boils down to an investment loss.

[pmacduff]

Thanks Bird, that's as I suspected.

I pretty much knew I couldn' tell the client what they want to hear, but it is one of my "best" clients and I thought I should throw it out there.

[wsp]

What's the profit sharing formula? is the owner hitting the max?

[Bill Presson]

Can you pay them a bonus that they defer into the plan?

[Peter Gulia]

A “restorative payment” that a fiduciary pays into a plan not to make up a plan’s losses from market fluctuations but rather because there is a reasonable risk that the fiduciary otherwise would be liable for his, her, or its breach of a fiduciary duty owed to the plan is not an annual addition counted against the IRC § 415© limit. Treasury Reg. § 1.415©-1(b)(2)(ii)©. Likewise, if a plan administrator allocates the payment as full or partial restoration of investment loss (including opportunity loss), rather than as one would allocate a contribution, the restoration wouldn’t count in most non-discrimination tests.

The plan fiduciaries must allocate such a restorative payment among all individual accounts that are affected by the breach, and must allocate it under an allocation method that fairly relates to each account’s losses attributable to the breach.

Of course, it remains for factual and legal-interpretation analysis whether the provision that the “GIC” contract describes as a “market value adjustment” really involves something other than “losses due merely to market fluctuations” and also that “there is reasonable risk of liability for breach of a fiduciary duty[.]” For both issues, the plan administrator that wants comfort that a payment is or is not an annual addition could get some protection under both ERISA and the Internal Revenue Code if it reasonably relies in good faith on an expert lawyer’s written opinion.

[J Simmons]

Peter, if it is the plan's fiduciary's decision to change from one provider to another, and thereby force the realization of the MVA to the GICs, do you know if the restorative treatment you described could be applied even if the forced MVA does not amount to a fiduciary breach?

[Peter Gulia]

Readers, please don't be offended that this post isn't a simple yes-or-no answer. The finding asked involves facts-and-circumstances interpretations, and a professional would want to do that after checking into all of the surrounding facts.

The finding that the plan administrator needs is a "reasonable risk of liability for breach of a fiduciary duty[.]” What the reg looks for is whether the fiduciary's fear that it could be liable is a reasonable fear.

While J Simmons' thoughtful follow-up inquiry asks us to assume a finding that there was no breach, real-world facts often aren't tidy and could be open to a range of interpretations. For example, a desire to exit an investment that hasn't yet matured sometimes is not investment-based and instead relates to poor administrative services provided by the investment's issuer or by a record-keeper that's somehow tied-in with the investment issuer. It often doesn't take much to find that the earlier selection of the poor-service provider might have been made with less diligence than a prudent-expert standard of care required.

Further, it's possible to have a risk of liability for a fiduciary breach without having a fiduciary breach. As any of us who have defended litigation know, once a plaintiff alleges a claim, the defendant bears a risk that a judge or jury will decide the claim differently than what the defendant believes is correct. A lawyer's advice about whether a particular set of facts and circumstances involves a "reasonable risk of liability ..." might consider that a reasonable person could fear liability, not because the fiduciary breached its duty, but rather because there are enough unfortunate facts for a claimant to state a plausible-enough allegation.

One also might look at what the facts suggest about potential motivations for the fiduciary's willingness to pay restoration. If 90% of the payment would be allocated to a business owner and people she has reasons (other than fear of liability) to favor, that might seem suspicious - at least in the absence of more persuasive evidence of a fiduciary breach. Conversely, a business owner's restoration payment that would be mostly allocated to a substantial group of non-highly-compensated employees might suggest that the business owner is willing to pay in the money because she recognizes sincerely that she acted as less than a prudent expert for the plan's investment and service-provider selections.

[J Simmons]

Thanks, Peter.

[pmacduff]

owner is contributing $20,500 for 2007, so bonus for additional 401(k) contributions not an option.

Owner doesn't max overall. The Company does normally make an annual profit share contribution (however did not for 2006). It's a straight percentage of comp (i.e. 2%) for everyone.

I did find out that there are 43 affected participants (not 25 as originally advised). The owner has the highest individual balance and his balance is approx. 18% of the total GIC fund.

Thanks for the thoughts and info.

[masteff]

Just thinking out loud... could the employer buy the securities that are inside the GIC at the greater of book value or market value? This would prevent all or most of the loss. And while it's a related party transaction, it would be for equal or more than market value.

[wsp]

Would the use of a new comp profit sharing formula come reasonably close to being a solution?

[pmacduff]

thanks wsp, I think a cross tested allocation would be cost prohibative (with everything that would be involved to add that allocation provision to the plan, fund it and such) all for an $8,000 mva.

The entire plan asset transfer isn't occuring as of yet, so I was thinking that another option (which would help only alittle) might be for participants to begin moving (within the allowable limits, of course) some of the $$ out of the GIC and into the other account investments. I believe they can move something like 10% of the GIC fund value within the current plan investments without mva. I would hope that the investment advisor would be on top of that anyway...

Certainly this will not change the entire mva, but would lessen the hit.