An investment is available only to people with high net worth

[katieinny]

The 401(k) has a very liberal self directed investment policy. A few of the HCEs want to invest in a vehicle that is limited to only high net worth individuals. While the plan does not prohibit the rank and file from investing in the same vehicle -- the investment itself is not available to them due to the high net worth restriction.

Can the plan permit the HCEs to invest knowing that the NHCEs could not invest due to the investment's restrictions?

[JanetM]

Wouldn't that be BRF failure? You have option that can't be used by NHCEs.

[Mike Preston]

While I'm sure there are some exceptions, I've heard the IRS say that this is an OK thing to do. As long as the restrictions are not imposed solely on this plan (that is, the restrictions are general and apply to all of the investment company's clients) and as long as the restrictions aren't in any way the result of this client's influence on the investment company, then the IRS/DOL believe, I believe, that there is no good reason to deny the plan an opportunity to invest in the vehicle. You should check with ERISA counsel, anyway, to ensure that there shouldn't be some form of alternative made available to the NHCE's as a guarantee of some sort of equilibrium, but I would doubt that it would be necessary in all cases.

[Guest mjb]

Q1 How is this a restriction imposed by the plan? Funds are applying rules imposed by SEC which restrict investments to accredited investors which is permitted under ERISA which does not preempt any other federal laws.

Q2 How can plan know of all restrictions on investments that are imposed by funds which are available under a directed brokere option?

[jpod]

If this is a 100% anything goes plan (i.e., you can invest in anything the trustee/custodian is willing to hold, including hedge funds and other non-registered securities), this is a non-issue insofar as brf is concerned; case closed.

If, on the other hand, this plan has limited investment options, one of which is the fund described by katieinny, than this is clearly a brf issue, in my opinion.

[Kimberly S]

An additional question to add to MJB's list: How can the employer know the employees' suitability? Perhaps their spouses have high income or a rich uncle left them money that would allow them to invest in this vehicle even though their salary implies that they could not.

[Guest Robin.Wolf]

An additional question to add to MJB's list: How can the employer know the employees' suitability? Perhaps their spouses have high income or a rich uncle left them money that would allow them to invest in this vehicle even though their salary implies that they could not.

I echo Kim's comment. Nothing is precluding a NHCE from being a high net-worth individual.

[pmacduff]

but even if the spouse has a high income and/or participant has the rich uncle's $$, that wouldn't be available to defer into the participant's 401(k) plan.

So....even if the NHCE IS a high net worth individual outside his/her employment, that doesn't affect the qualified plan in the original example!

just my 2 cents.

[Guest mjb]

but even if the spouse has a high income and/or participant has the rich uncle's $$, that wouldn't be available to defer into the participant's 401(k) plan.

So....even if the NHCE IS a high net worth individual outside his/her employment, that doesn't affect the qualified plan in the original example!

just my 2 cents.

Why not? The $ requirements for being an accredited investor to invest in a particular security takes all investible assets into account not just retirement benefits. It is possible that a NHCE who is working part time after retirement would have sufficient assets, including employer stock from prior emplyment with a corporation to meet the requirements of an accredited investor regardless of the amount of assets held in his current employer's 401k plan. He and his wife could have sufficient assets for him to be an accredited investor.

[pmacduff]

I did not read the OP carefully; sorry.

I thought it was an example of a plan investment where the minimum investment amount was, as an example, $10,000 to purchase shares. Most participants would not have the $10,000 minimum.

I misinterpreted that the requirement was referring to "high net worth individuals" investing and not necessarily the amount necessary to invest.

Again, my apologies.