401k plan investments

[Gary]

I have done quite a bit of calculating regarding non discrimination testing, but am limited in the amount of practical plan admin and communications for 401k plan investing.

With that said, below is a situation that I need to research further, but I submit a post to get some feedback as well:

A small company - (owner and say 10 eligible employees) implements a 401k profit sharing plan where such plan provides:

- elective 401k contributions

- 3% 401k safe harbor contributions

- discretionary profit sharing contributions w/ 3 year cliff vesting

the client wants to have one sub account for each participant that consists of the 401k deferrals and 3% safe harbor contribution - he wants this account self directed where each employee manages their own Schwab account and can invest in whatever they want

To my knowledge this approach seems allowed, though not likely a 404c protected situation. is that correct? Or other suggestions?

The client than wants a second account for each employee that consists of their profit sharing contributions - he has a few methods he wants to consider for this account:

1) he manages these assets until the employee is vested and then allows for self direction at that time

Is this approach allowed or other suggestions?

2) or he would have the account be self directed but with a menu of say 6 investment options or so to keep it more safe and simple for the employee and when the employee is vested he could then transfer the profit sharing account into the 401k account so employee can fully manage all assets.

Is this allowed or other suggestions?

In conclusion this 401k profit sharing plan investing and self direction can seem a bit awkward or unclear to me.

Any suggestions/alternatives in general to handle/respond to these types of client questions/ideas?

Thanks.

[J Simmons]

I have done quite a bit of calculating regarding non discrimination testing, but am limited in the amount of practical plan admin and communications for 401k plan investing.

With that said, below is a situation that I need to research further, but I submit a post to get some feedback as well:

A small company - (owner and say 10 eligible employees) implements a 401k profit sharing plan where such plan provides:

- elective 401k contributions

- 3% 401k safe harbor contributions

- discretionary profit sharing contributions w/ 3 year cliff vesting

the client wants to have one sub account for each participant that consists of the 401k deferrals and 3% safe harbor contribution - he wants this account self directed where each employee manages their own Schwab account and can invest in whatever they want

To my knowledge this approach seems allowed, though not likely a 404c protected situation. is that correct? Or other suggestions?

Yes you can structure this 'brokerage window' in this way, and even do so in a way that is in compliance with 404c. See the court decisions in Heckler v Deere Co, a Wisconsin federal court case that has been reviewed on appeal by the 7th Circuit Court of Appeals.

The client than wants a second account for each employee that consists of their profit sharing contributions - he has a few methods he wants to consider for this account:

1) he manages these assets until the employee is vested and then allows for self direction at that time

Is this approach allowed or other suggestions?

Yes, it is allowed, but it is cumbersome. In the plan documentation or written policies, you want to be clear how often it will be determined how much is vested and then transferred to where it can then be invested as directed by the EE per a 404c policy. Suggestions? Just let each EE direct the investment of the vested and unvested amounts accrued to his benefits--all of it being under a 404c policy.

2) or he would have the account be self directed but with a menu of say 6 investment options or so to keep it more safe and simple for the employee and when the employee is vested he could then transfer the profit sharing account into the 401k account so employee can fully manage all assets.

Is this allowed or other suggestions?

Yes, but you'd need to make sure that for each EE given his age, education and earnings levels that at least three options with different risk/return characteristics make sense for that EE. Also, you'd need to monitor the 6 or so choices, probably quarterly and develop written file materials explaining why which of the choices was continued, why others were dropped or replaced, and why the new choices were added. There is more chance for liability for investment underperformance here where the choices the EEs have are so limited.

[mbozek]

Its been a while since I last looked a this but I think this arrangement would subject to the nondiscrimination requirements for benefits, rights and features known as current availability under the IRS regs.