investment options in 401k

[Guest lip]

If employer has his p/s monies at let's say Smith Barney,and employees are at Am Funds;is that permissable?

If he gives everyone option to be at Smith Barney and none choose it is that ok?

ty

Stan

[J Simmons]

As long as all employees have the same set of brokerage house options from which to select (i.e., open architecture), it is not discriminatory that the hces pick different options than the nhces.

[Below Ground]

In support of J Simmons's post, it is not that unusual to see a Plan that has most employees in mutual funds (structured accounts), and a few "high-rollers" in brokerage account (lower structured accounts). The key is availablity of the use of brokerage accounts. To document that people were offerred the the brokerage account you may wish to have people sign an "election form" that shows they were offerred the brokerage account and chose the mutual fund account. Similar to coverage testing (please note coverage not ADP) for a salary deferral provision, it is not how many use the feature, it is how many could.

[ak2ary]

and make sure the brokerage option does not have a minimum balance requirement which would make it not effectively available to the nhces

[J Simmons]

and make sure the brokerage option does not have a minimum balance requirement which would make it not effectively available to the nhces

Generally, I don't think that's a problem if the same minimum balance is imposed by the brokerage and not contrived or imposed by the plan, and it is applied to all plan participants/beneficiaries. I'm sure that you could fathom an unlikely scenario, such as a plan allowing only two investment options: one that requires $100,000 minimum balance and the other simply a money market account. That would likely be problematic particularly if the only ones with $100,000 or more in their accounts are hces.

[ak2ary]

Consider a plan that offers a menu of 10 mutual funds of varied risk and return characterictics and a money market and also offers a brokerage account but to access the brokerage account you needed to have an account balance of 100,000. Further assume that none of the NHCEs had such a balance. I believe that option is not effectively available to the NHCEs and is clearly a benefit right or feature and is a real problem

I think it matters not for effective availability puposes whther the 100,000 is a mutual fund rule or a plan rule

[J Simmons]

By letter dated January 26, 1999, comments by members of the Committee on Employee Benefits about and a request for clarification concerning nondiscrimination standards of what was termed "open option" participant directed plans were forwarded by the chair of the ABA's Section of Taxation to the Commissioner of the IRS. One of the 'operational results' posited for comment and clarifications was that "Participants in an open option program may receive solicited and unsolicited investment opportunities from parties that are not affiliated with the plan, some of which may require that a minimum dollar amount be invested in order to make any investment. It is possible that the minimum dollar amount threshold might make these investments available primarily or exclusively to predominantly nonhighly compensated employees."

Those comments specifically acknowledged that the right to a particular investment is an "other right or feature" per Treas Reg sec 1.401(a)(4)-4(e)(3)(iii)(B) and ©, but opined that "where certain investment opportunities are, in practice, effectively unavailable to nonhighly compensated employees, not as a result of plan limitations but as a result of external market practices" should not be discriminatory "because the lack of availability is not the result of any restriction imposed by the plan or any action taken by any fiduciary. Instead, the lack of availability is the result of the actions of third parties or advisers who either were selected by plan participants or who, on their own initiative, without the involvement of the plan or its fiduciaries, approached the participants. In no event could (or should) the plan or its fiduciaries control (or preclude) these practices."

I am aware of no response from the IRS, either accepting or rejecting the analysis and opinion contained in those comments. The IRS has left that posed question unanswered for more than 9 years now.

The position that such minimum thresholds are or may be discriminatory could have serious implications for plans that permit both participant loans and investment directions. Most plans that have both features coordinate them through a provision that explains a participant loan shall be considered a plan investment directed by that participant. The loan program may limit the amount that may be borrowed by a participant, for example, to 1/2 VAB. For someone with $100,000 or more of VAB, he or she could borrow $50,000. But the participant with just, say, $29,000 of VAB, he or she could just borrow $14,500. Does the discrepancy in how much can be borrowed, and thus be a directed investment, pose a nondiscrimination challenge since there is likely a correlation between larger VAB balances and hce status? Would you have to limit the loans to the 'lowest common denominator', the lowest amount that anyone could borrow?

[ak2ary]

To assume that the IRS agrees with a question because they chose not to answer it is beyond dangerous. The question posed put the plan and the fiduciaries in the best light possible and still the IRS would not back it. In fact few plans allow independent third parties to come in and solicit employees accounts as posited in the question. Rather, the more common setup is that a menu of mutual funds is offered and then a brokerage account option is offered through the same provider or one or two other providers. Very few fiduciaries are willing to track a zillion random brokerage accounts.

In the situation I described, a borkerage window was offered with a minimum. By selecting that provider, the plan fiduciaries essentially set the minimum. Its a BeRF and it aint currently available to NHCEs and its big trouble. If the employer/trustee wanted to, they could negotiate a blended fee to be paid across all the brokerage accounts and eliminate the minimum...but they don't because they want to provide lower fees to the HCEs

[Guest fender5150]

Permissible is one thing; prudent is another. I would not want to be the Plan Sponser for a 401k that provides a higher level of service for investors with a high balance.

Based on the case law I've been hearing about lately; if your plan is big enough, a lawyer could find this attractive. All you need is one year when one group does better than another.

Thanks,

Fender

www.401ktest.com

[J Simmons]

If the sponsor or the plan provides a higher level of service, there's a discrimination problem.

However it is quite another matter to say that in an otherwise open architecture environment that the plan is discriminatory unless it prohibits all participants from directing the investment of his/her benefits in any commercially-available option that requires a minimum balance that is greater than some other participants' benefits balances.

[Guest mjb]

Permissible is one thing; prudent is another. I would not want to be the Plan Sponser for a 401k that provides a higher level of service for investors with a high balance.

Based on the case law I've been hearing about lately; if your plan is big enough, a lawyer could find this attractive. All you need is one year when one group does better than another.

Thanks,

Fender

www.401ktest.com

Care to explan what interest a lawyer would have in suing a plan that had such a provision. Why would a difference in performance be grounds for a suit under ERISA? What if performance was better for the program with the lower level of service which would be available to those participants who had the higher balance? If they elected the higher level of service wouldnt the investment return be due the their exercise of control under 404©?

[ak2ary]

its not a greater than some other person's balance standard its does the group of people whose accounts satisfy the minimum meet the numerical determination of a nondiscriminatory classification of employees under 410(b)

[Guest mjb]

its not a greater than some other person's balance standard its does the group of people whose accounts satisfy the minimum meet the numerical determination of a nondiscriminatory classification of employees under 410(b)

but 410b is a regulatory matter for the IRS not for a lawyer because there is no private right of action for violation of the rules for qualification.

Also you stated that "All you need is for 1 year when one group does better than another"

[masteff]

its not a greater than some other person's balance standard its does the group of people whose accounts satisfy the minimum meet the numerical determination of a nondiscriminatory classification of employees under 410(b)

but 410b is a regulatory matter for the IRS not for a lawyer because there is no private right of action for violation of the rules for qualification.

Also you stated that "All you need is for 1 year when one group does better than another"

MJB - slow down your argument mode. The person who just posted is not the person to whom you were asking your question to further above.

[four01kman]

I don't think performance differentials ever come into play in determining whether there is a failure to comply with Code Section 4 10(b) and 401(a)(4). The issue is one of discrimination from an IRS standpoint. It appears if "effective availability" is not met either because of "minimums" or just lack of usage by non-HCEs, the IRS could posit a discriminatory plan, with all the bad stuff that could then occur.

[Guest fender5150]

Similar to coverage testing (please note coverage not ADP) for a salary deferral provision, it is not how many use the feature, it is how many could.

IE: The coverage test might have a place in this scenario; but even if it doesn't;

I do believe performance differentials could come into play if there is a different level of service offer to only certain participants. Specifically; I was responding to the scenario illustrated by Ak2ary:

"If the employer/trustee wanted to, they could negotiate a blended fee to be paid across all the brokerage accounts and eliminate the minimum...but they don't because they want to provide lower fees to the HCEs".

The lawsuit game isn't always played to win, it's sometimes played to get past summary judgement.

Thanks,

Fender

[Guest lip]

By letter dated January 26, 1999, comments by members of the Committee on Employee Benefits about and a request for clarification concerning nondiscrimination standards of what was termed "open option" participant directed plans were forwarded by the chair of the ABA's Section of Taxation to the Commissioner of the IRS. One of the 'operational results' posited for comment and clarifications was that "Participants in an open option program may receive solicited and unsolicited investment opportunities from parties that are not affiliated with the plan, some of which may require that a minimum dollar amount be invested in order to make any investment. It is possible that the minimum dollar amount threshold might make these investments available primarily or exclusively to predominantly nonhighly compensated employees."

Those comments specifically acknowledged that the right to a particular investment is an "other right or feature" per Treas Reg sec 1.401(a)(4)-4(e)(3)(iii)(B) and ©, but opined that "where certain investment opportunities are, in practice, effectively unavailable to nonhighly compensated employees, not as a result of plan limitations but as a result of external market practices" should not be discriminatory "because the lack of availability is not the result of any restriction imposed by the plan or any action taken by any fiduciary. Instead, the lack of availability is the result of the actions of third parties or advisers who either were selected by plan participants or who, on their own initiative, without the involvement of the plan or its fiduciaries, approached the participants. In no event could (or should) the plan or its fiduciaries control (or preclude) these practices."

I am aware of no response from the IRS, either accepting or rejecting the analysis and opinion contained in those comments. The IRS has left that posed question unanswered for more than 9 years now.

The position that such minimum thresholds are or may be discriminatory could have serious implications for plans that permit both participant loans and investment directions. Most plans that have both features coordinate them through a provision that explains a participant loan shall be considered a plan investment directed by that participant. The loan program may limit the amount that may be borrowed by a participant, for example, to 1/2 VAB. For someone with $100,000 or more of VAB, he or she could borrow $50,000. But the participant with just, say, $29,000 of VAB, he or she could just borrow $14,500. Does the discrepancy in how much can be borrowed, and thus be a directed investment, pose a nondiscrimination challenge since there is likely a correlation between larger VAB balances and hce status? Would you have to limit the loans to the 'lowest common denominator', the lowest amount that anyone could borrow?

thanks very much