FIDUCIARY ISSUES/PROH. TRANSACTION

[Guest Lonnie Tomlin]

Have a not profit organization A that sponsors a 401(k) plan. Org A has a for profit subsidiary B that markets products, including investments for TSAs and qualified plans. Sub B has a subsidiary, C which is its broker dealer for securities for the retirement plan. The trustees for the 401(k) plan is the Vice President of HR & the CFO Org A and the Director of Consulting Services for Sub B. The Director is a registered representative for securities. The 401(k) plan investment options are asset managed accounts through a broker dealer. The trustees are considering replacing the current options with mutual funds from PUTNAM, through Sub C. The returns historically in these funds exceed the current offerings and the expenses are much less. The recordkeeping has been brought in-house and reviewed by an outside consultant. What issues should we be concerned with from a fiduciary and prohibited transaction stand point? The registered representative on the board would not be the account manager for the 401(k) plan. Any information would be appreciated.

[Jon Chambers]

I'd say it depends on the size of the organization and the class of Putnam shares being considered. If shares are Class Y, then there are no significant PT issues. If shares are A, B or C, and Sub C will receive commissions, then there are numerous potential PT and fiduciary issues. More info would be helpful.

[Dowist]

If Sub C (or any member of the controlled group) would receive any fees as a result of selecting the new mutual funds, you would probably have a prohibited transaction under ERISA ss 406(B), unless there was a class exemption. There are a number of class exemptions out there, but you'd have to look, and you'd have to make sure all of the conditions of the class exemption are met.

[Kirk Maldonado]

Jon:

Please explain the significance of the difference classes of shares.

[Jon Chambers]

Class Y shares are institutional, and pay no commissions. They are also the "best deal" that Putnam offers for funds. With no commissions, and no less expensive fund option (at least from Putnam), the PT issue almost certainly goes away. With A, B or C class shares, Sub C may need to meet one of the class exemptions discussed above.