proprietary funds and 406(b)

[Guest cac1134]

Is there any way around 406(b) to permit the plan sponsor to direct the investment of the profit sharing piece of an individual account 401(k) plan in a proprietary fund?

[Peter Gulia]

Before a plan fiduciary or a plan sponsor decides whether either really wants funds managed by the employer or its affiliate as investments of the retirement plan, those involved might read the plaintiffs’ complaints in some of the lawsuits on that topic. (Some settled; at least one began recently.) Even if they’re confident they’ll win it, does your client want to invite litigation?

Further, even if the client’s practical legal risk is remote or almost none, some practitioners worry about one’s own reputation risk or just can’t get comfortable ethically.

To answer cac1134’s question, there are some ways to design a plan or choose its investment menu to use “house-brand” funds so that the investment is not an ERISA § 406(b) prohibited transaction. All of the ways that I know about require lawyering, and all but one or two require independent experts.

Any real discussion of this topic involves information that one wouldn’t want written in a forum that’s open to anyone with an Internet browser. (I’ve advised clients on both sides, about attacking or defending these arrangements.) If you’d like to talk about this, please feel free to call me.