Bank leveraging company loan to get 401k business

[Guest dstran]

I have a client who recently got a loan for their company business from a local bank. when the bank learned that the company was putting their 401k plan out to bid, they have stongly suggested the company move their 401k plan over to the bank. While the company has done some due diligence to look at the banks 401k product, it seems the overall plan expenses would be a little higher, and they would have to sacrafice some services they are getting today if they moved to the bank. the company is willing to do this because of the loan. what are your thoughts on this?

[GMK]

I see frowns around the table. Someone is muttering something about how the Plan can only benefit the participants and their beneficiaries, and not the plan administrator (the company), etc. And for a higher cost with less service??

[JanetM]

Is the plan sponsor, a fidicuciary, going to be able to document that the move to the bank with attendent higher fees is in the sole interests of the participants? This smells bad. If the bank is going to give company a discount on loan if they get the fee revenue from 401k plan it would be a PT.

[Guest Sieve]

Assuming the loan already has been given to the company, the decision to move plan assets to the bank will not be a PT. However--as JanetM indicated--if the loan is still pending, and the movement of trust assets is for the purpose of receiving a reduced interest rate on the employer's loan, that would be a PT: the employer would be "dealing with the . . . assets of the plan in [the employer's] interest . . .' (IRC Section 4975©(1)(D); ERISA Section 406(a)(1)(D).)

Also, the bank, which would be providing services to the plan, is exempt form the "furnishing of . . . services" PT under the Code's & ERISA's statutory exemptions. (IRC Section 4975(d)(6) & ERISA Section 408(b)(6).

But I disagree with JanetM & GMK to the extent that they believe that cost and services are the only factors for a fiduciary to consider when moving trust assets. There clearly are other important considerations, such as investment returns, investment products, administrative ease & accuracy, customer service (e.g., responsiveness to employee/employer concerns, correction of errors), experience & expected longevity in the business, financial stability, etc., etc. The fiduciary must consider all of these before choosing, and must not be too laser focused on cost considerations alone. ERISA does not require that the employer provide the absolute best or absolute cheapest service or investments, but only that due diligence is performed and appropriate consideration is given to all applicable matters.

[J Simmons]

And the touchstones for that due diligence are what is solely in the best interests of the participants and beneficiaries, for the exclusive purpose of providing them benefits and

defraying reasonable expenses of administering the plan.

[BG5150]

Devils advocate: The company doesn't move the plan, gets a higher interest rate or no loan at all. Company goes belly up because of it. Now, no one has a job. THAT can't be in the best interests of the participants!

/devil's advocate

[GMK]

Sorry if I appeared focused on expenses and services. Those were red flags in the OP, as was "some" due diligence.

Of course, all aspects must be reviewed and compared. It's just hard to see how to justify increasing costs and reducing services (some of which may be services to participants, we don't know) without balancing those losses with a positive gain or at least the prospects of a positive gain for the participants and their beneficiaries. And it would be wise to avoid PT's, as JanetM cautioned.

I read the OP to say that the loan has already been made and is not dependent on the bank's getting the 401(k).

If full due diligence shows that the 401(k) participants and their beneficiaries would be at least as well off with the plan at the bank, and if the financial benefits of the move go exclusively to the participants and their beneficiaries, then I think you can consider moving to the bank. I recommend against making the move merely as a "Thank you for the loan" without checking everything out first.

[Guest Sieve]

BG (alias devil . . .) --

Employer decisions as the employer--e.g., getting or not getting the loan--are not fiduciary decisions. Bad news (as you stated): company goes belly-up. Good news: it's not an ERISA breach of fiduciary duty . . . !!