Trade Authorization

[Guest Ben Schmidt]

I know that it is not allowable for one person to be given trade authorization in order to direct the investments of a participant (i.e. a plan participant may not grant their spouse trade authority in order to direct the investments within their 401(k) account). The problem is that I can not find any DOL, IRS, Treas Reg or ERISA guideline that specifies that it is not allowable for a 401(k) to permit any plan participant to add any individual to their participant account has having "trading authority" on their account in order to direct the investments on their behalf.

Guidance? Thoughts?

[Peter Gulia]

Ben Schmidt, I suggest that you might revisit your assumption.

Many retirement plans provide, at least by implication and sometimes in an express provision, that a participant or other person who has a duty or power to direct investment may appoint an agent to furnish the investment directions.

At least for an ERISA-governed plan, a plan may set rules on what power of attorney or other expression of an agency authority the plan administrator does or doesn’t accept. If that’s in the plan documents, the plan’s administrator usually must follow the documents. ERISA § 404(a)(1)(D). Even in the absence of written provisions, a court might defer to the administrator’s exercise of discretion if it’s a plausible interpretation of the plan and relevant law and is not an abuse of discretion. See, e.g., Clouse v. Philadelphia, Bethlehem & New England Railroad Co., 787 F. Supp. 93 (E.D. Pa. 1992).

For a plan not governed by ERISA, the plan’s administrator might need to consider whether State law requires the plan to recognize a power of attorney.

Whether a plan’s administrator (or its recordkeeper) wants to recognize (or refuse) an agent to furnish directions for a participant or other directing person often turns on practical considerations about whether it’s feasible under the plan’s procedures to record the fact of an agent’s appointment and retrieve information as needed to test the identity of a person who would render a direction.

In the 1980s, questions about whether, and on what terms, to recognize an agent mattered. If a plan permits computer-based means to furnish an investment direction, expressly recognizing an agent matters less often. If a direction was furnished using the participant’s identifying information and password and none of the plan’s fiduciaries knows (or, in the exercise of the care required, should know) that the direction was furnished by an impostor, a plan can make the participant responsible for such a direction.

Practice pointer: If a plan fiduciary is at least trying for the possibility of a defense under ERISA § 404©, consider whether the explanation that must be furnished under 29 C.F.R. § 2550.404c-1(b)(2)(i)(B)(1)(iv) must or should explain what the plan allows or refuses concerning whether a directing person may appoint an agent.

[mbozek]

I know that it is not allowable for one person to be given trade authorization in order to direct the investments of a participant (i.e. a plan participant may not grant their spouse trade authority in order to direct the investments within their 401(k) account). The problem is that I can not find any DOL, IRS, Treas Reg or ERISA guideline that specifies that it is not allowable for a 401(k) to permit any plan participant to add any individual to their participant account has having "trading authority" on their account in order to direct the investments on their behalf.

Guidance? Thoughts?

The reason you cant find any rule that a 401k plan participant cannot grant trading authority to another person is because the DOL regs expressly allow a participant to appoint their own fiduciary to manage their investments. See DOL reg 2550.404c-1(f) example (9) which specifically authorizes a plan participant to hire an investment manager as a fiduciary to direct his investments in the plan if the plan permits such delegation. Under the Reg the investment manager is the fiduciary to the plan participant but the plan fidiuciary has no duty to advise the investment manager and the plan fiduciary is not a co-fiduciary with the investment manager. In addition, the plan fiduciary has no duty to determine the suitability of the investment manager because the plan did not designate the investment manager.