Prohibited Transaction?

[Guest Iwonder]

Here is the situation:

A business, ACME Widgets, appointed X (a company, not an individual) as investment manager for ACME's sponsored ERISA plan assets. X is not a bank or a financial institution.

X is the fund manager of a group trust. The Trustee of the Group Trust, Big Bank, is not Trustee of ACME's Plan.

X plans to invest almost 100% of the ERISA Plan's assets intothe Group Trust.

Is this permissible?

[My 2 cents]

My vote is that it would not be a prohibited transaction but that it does appear to represent a potential conflict of interest. The Trustees retain the fiduciary obligation to select the plan's investments appropriately.

Doesn't Fidelity do things like this all the time? The Trustees hire Fidelity and Fidelity picks one or more of the funds they manage and puts the money into them. Or am I missing something here?

[Guest Iwonder]

My vote is that it would not be a prohibited transaction but that it does appear to represent a potential conflict of interest. The Trustees retain the fiduciary obligation to select the plan's investments appropriately.

Doesn't Fidelity do things like this all the time? The Trustees hire Fidelity and Fidelity picks one or more of the funds they manage and puts the money into them. Or am I missing something here?

You are probably correct. It just appeared very unusual. I really appreciate your quick response.

[MSN]

I would go the other way on this. I'm going to go out on a limb and assume that X is compensated for being the fund manager of Group Trust.

In light of this, this appears to be a form of self dealing prohibited under ERISA 406(b)

Act Sec. 406. (b) A fiduciary with respect to a plan shall not--

(1) deal with the assets of the plan in his own interest or for his own account,

(2) in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or

(3) receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.

Bundled providers don't "get away" with this...they have carefully structured the agreements to where any fiduciary does not have the ability to engage in self dealing. There is (generally) nothing wrong with a plan sponsor hiring multiple affiliates.