During blackout period for trustee/recordkeeper conversion, what shoul

[EGB]

Assume a blackout period of 10 weeks for a 401(k) plan conversion to a new trustee/recordkeeper (and assume that the length of the blackout period is not questionable, ie, that is was reasonable). The "mapping" approach is used for the conversion. Accounts are participant directed (except during the blackout period). Employee deferrals are withheld from employee's paychecks during the blackout period. What should/can happen to those employee deferrals during the blackout period? Can the employer continue to hold those deferrals in a separate interest bearing account (for its own account) until such time as the blackout period expires? Beyond the time prescribed by DOL Reg. 2510.3-102 (ie, at latest, 15 days into the month following the month withheld), it seems this would constitite a prohibited transaction.

I am looking at this issue for a client. The new trustee refused to take the employee deferrals from the employer during the blackout period. Thus, the employer placed the deferrals in an interest-bearing account (for its own account) until the blackout period had expired. Is this common/acceptable? It seems a clear violation of the DOL Reg. Though I recognize that the deferrals cannot be invested pursuant to participant's directions until the end of the blackout period, it seems that the deferrals should be held by the trustee in a money market or something of that nature.

Any thoughts would be appreciated.

[MWeddell]

I agree it sounds like a violation of the plan asset regulations. Most service providers will direct contributions received during the black out period in accordance with participant investment elections, so the problem really shouldn't arise. In your client's situation where the service provider couldn't provide that service, the separate interest-bearing account should have been opened in the trustee's name, not the employer's name.

[Guest PAUL DUGAN]

I feel the solution to this problem is to find another trustee/recordkeeper. There are some out there that know and understand the law. If they screw up on this basic question what can you expect in the future.

[EGB]

Thanks for your responses. The trustee is a reputable trustee that we all know. That is why I am perplexed by this. Is it most people's experience that during a blackout period, the new employee deferrals are directed pursuant to participants' directions (in a participant-directed plan)? Or, at a minumum, held by the trustee (rather than the employer) in a money market or similiar investment vehicle until the blackout period expires?

[EGB]

Thanks for your responses. The trustee is a reputable trustee that we all know. That is why I am perplexed by this. Is it most people's experience that during a blackout period, the new employee deferrals are directed pursuant to participants' directions (in a participant-directed plan)? Or, at a minumum, held by the trustee (rather than the employer) in a money market or similiar investment vehicle until the blackout period expires?

[bzorc]

In my experience, the new trustee should have gathered investment elections for new contributions. During the blackout, the contributions should have been invested per participant elections. As a former daily valuation recordkeeper, this procedure was normal protocol. The placing of the money in an interest bearing "plan" account, to me, is highly unusual, and could open the trustee/recordkeeper to liability issues, especially with the market moving up and down in wide swings.

Hope this helps.

[Guest tjmartens]

I know when we take over a plan, we usually enroll the participants immediately and setup the new accounts. Then, the new deferrals are able to be deposited immediately into the new accounts as directed by the participants. If for some reason we do not have the accounts set up right away, the funds are deposited in the retainer/money market account until they can be allocated to the proper funds.

Meanwhile, we are gathering data on the existing/takeover accounts and preparing the conversion of funds to the new contract simultaneously. This time period varies depending on how long it takes to get the transfer and the breakdown information. Again, the transfer goes to the retainer/money market until the breakdown and allocation can be done.

I agree that I would not be comfortable with the trustee holding the funds.

[Jon Chambers]

There are several issues here:

1) Trustee approach does not conform to industry standard, which is to accept and invest contributions according to participant's new elections, without lifting the blackout (some providers do a "gray out", where participants have access to information about new contributions, don't have access to pending transfer amounts).

2) Investment according to participant elections isn't required. You do this to get 404© relief, and to keep participants happy. Since 404© relief is transactional in nature, having contributions invested according to some reasonably prudent default arrangement is fine, and doesn't taint the relief for the remainder of the plan.

3) 404© relief (generally) requires that participants be permitted to transfer funds at least quarterly. As long as the blackout doesn't go much past 12 weeks, and the mapping is reasonable, you probably have 404© relief through the mapping period.

4) Although I don't understand why the new trustee refuses to accept the ongoing contributions, to meet the DOL asset regs, the plan sponsor merely needs to segregate the contributions as plan assets, and invest them prudently. These separate assets are technically part of the trust. Given the relatively brief time frame, a money market seems like a prudent (although potentially unpopular) investment. But interest on the money market would have to be allocated to participants--the sponsor couldn't keep the interest.

[EGB]

Jon - thanks for yoru response. Are you of the opinion that the employer can simply segregate the assets into a seperate account under its own name and that this will be ok under the DOL Reg. so long as the interest accumulated is eventually allocated to participant's accounts? My personal opinion is that it is not enough to segregate the assets; that those assets must be placed in the name of the trustee (as MWeddell noted above) so that they would not be subject to the creditors of the employer.

[EGB]

Jon - thanks for yoru response. Are you of the opinion that the employer can simply segregate the assets into a seperate account under its own name and that this will be ok under the DOL Reg. so long as the interest accumulated is eventually allocated to participant's accounts? My personal opinion is that it is not enough to segregate the assets; that those assets must be placed in the name of the trustee (as MWeddell noted above) so that they would not be subject to the creditors of the employer.

[EGB]

Jon - thanks for yoru response. Are you of the opinion that the employer can simply segregate the assets into a seperate account under its own name and that this will be ok under the DOL Reg. so long as the interest accumulated is eventually allocated to participant's accounts? My personal opinion is that it is not enough to segregate the assets; that those assets must be placed in the name of the trustee (as MWeddell noted above) so that they would not be subject to the creditors of the employer.

[Jon Chambers]

I haven't looked at the asset regs recently, but used the term "segregate" because that's the terminology I remember from the regs. My point was that if the assets (contributions)are in fact segregated, they de facto become part of the trust, regardless of the title of the account, or whether or not the new trustee accepts them. Using the logic of the regs, if the assets aren't part of the trust, they aren't "segregated". I agree with your general conclusion that it makes sense to title the account as being owned by the trust.

Hope this helps.

Jon

[Guest]

The 'segregate' part does mean to separate from employer's assets. Part of the purpose is to move the 'deferred wages' from the reach of the the employer's creditors. Since participant investment direction is a privilege and not a right, it is subject to revocation at any time.

One question that comes to mind, 'what does the reputable trustee normally suggest to plan sponsors who continue to collect deferred wages during a black-out period?' What do they suggest should be done with those refused deferrals?

Jon is of course correct that 404© is a significant consideration when providing investment direction. But frankly, I do not believe most plan sponsors could pass strict scrutiny if 404© compliance was tested. So to say a 'black-out period' will cause a plan sponsor to lose 404© compliance may be not practical. If a sly attorney wishes to challenge that compliance, he will likely be successful, with or without a black-out period.

We always recommend to our clients that they should maintain a non-interest bearing checking account for general plan purposes. Non-interest bearing because allocating earnings is usually more trouble than it is worth. Mingling trust assets with employer assets is a prohibited transaction.

When we take over a plan, we try to get enrollments for participants prior to the conversion of general plan assets. In this way, we avoid the cirsumstance that you desribed. But then most of the plans we service are self-trusteed, so we have not dealt with a trustee who refused deferral deposits.

Good Luck.