Prohibited Transactions within a 401(k) Plan

[Guest Jeramy P. Lembeck]

Is it possible for the Broker of Record for a 401(k) plan to also be a participant? Does this not conflict with their fiduciary responsibilities?

More information:

Broker has written consent from the board, but any materials sent to the participants, the Brokers name is left out. Does the name of the Broker have to be disclosed to the participants?

What is the responsibility of the Investment Company that knows about the situation? From what I hear, they asked for a written statement from the Trustees for the Broker of Record, but could they be held liable??

If I am not clear, please ask!!

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Respectfully,

Jeramy P. Lembeck

[Jon Chambers]

1) It sounds like a prohibited transaction to me. Broker is a party in interest to the plan in two capacities (participant and broker). I'm an investment advisor (fee only), not an attorney, so this is not a legal opinion, but I'm not aware of any class exemptions that would solve this PT.

2) There are no disclosure rules that apply to other participants.

3) It's unclear whether the co-fiduciary liability rules apply to the Investment Company that knows about the situation. Assume (a) that the IC is a fiduciary; and (B) that the situation is a PT. In this scenario, IC would be liable if they did nothing to "cure" the problem.

[Guest ptpnthr]

My first question is whether the broker is an employee? If not, the broker can't participate in the 401(k) Plan. I'm guessing that is your answer, but in case she is an employee, I will continue. If she is an employee, she can participate provided she satisfies the plan's eligiblity and participation requirements. The question is then, can a participant in a 401(k) Plan be a broker to the Plan? I don't see why not. That is like asking can a fiduciary be a participant and the answer is yes. Of course, you have to satisfy the PT requirements (b/c as an employee covered by the plan she is a party in interest even before becoming a broker to the plan) of ERISA Section 408(B)(2), and frankly I would recommend against having an employee participant be a broker to the plan b/c of the fiduciary issues, but it can be done, though not recommended.

If the participants ask the right questions then you should disclose request her name. For example, ERISA requires you to disclose upon written request any contract under which the plan is established or operated. I would argue that the contract with a broker is a contract under which the plan is operated. Even if you disagree, courts have (maybe) expanded disclosure requirements, particularly upon request. In a 401(k) Plan with participant directed accounts, I'm pretty sure the DOL and the courts would want you to disclose who the broker is when asked. Of course, you don't have to volunteer the names of all plan service providers if no one asks.

You 3d question makes me believe this broker is not an employee, but if she is, eld liable for what? If they are a party in interest who participate in the PT, they could be liable for the taxes and penalties. If they are a fiduciary who particpate in a breach of fiduciary duty, they could be liable for the breach.

[Guest ptpnthr]

My first question is whether the broker is an employee? If not, the broker can't participate in the 401(k) Plan. I'm guessing that is your answer, but in case she is an employee, I will continue. If she is an employee, she can participate provided she satisfies the plan's eligiblity and participation requirements. The question is then, can a participant in a 401(k) Plan be a broker to the Plan? I don't see why not. That is like asking can a fiduciary be a participant and the answer is yes. Of course, you have to satisfy the PT requirements (b/c as an employee covered by the plan she is a party in interest even before becoming a broker to the plan) of ERISA Section 408(B)(2), and frankly I would recommend against having an employee participant be a broker to the plan b/c of the fiduciary issues, but it can be done, though not recommended.

If the participants ask the right questions then you should disclose the broker's name. For example, ERISA requires you to disclose upon written request any contract under which the plan is established or operated. I would argue that the contract with a broker is a contract under which the plan is operated. Even if you disagree, courts have (maybe) expanded disclosure requirements, particularly upon request. In a 401(k) Plan with participant directed accounts, I'm pretty sure the DOL and the courts would want you to disclose who the broker is when asked. Of course, you don't have to volunteer the names of all plan service providers if no one asks.

You 3d question makes me believe this broker is not an employee, but if she is, held liable for what? If they are a party in interest who participate in the PT, they could be liable for the taxes and penalties. If they are a fiduciary who particpate in a breach of fiduciary duty, they could be liable for the breach.

[Guest ptpnthr]

My first question is whether the broker is an employee? If not, the broker can't participate in the 401(k) Plan. I'm guessing that is your answer, but in case she is an employee, I will continue. If she is an employee, she can participate provided she satisfies the plan's eligiblity and participation requirements. The question is then, can a participant in a 401(k) Plan be a broker to the Plan? I don't see why not. That is like asking can a fiduciary be a participant and the answer is yes. Of course, you have to satisfy the PT requirements (b/c as an employee covered by the plan she is a party in interest even before becoming a broker to the plan) of ERISA Section 408(B)(2), and frankly I would recommend against having an employee participant be a broker to the plan b/c of the fiduciary issues, but it can be done, though not recommended.

If the participants ask the right questions then you should disclose the broker's name. For example, ERISA requires you to disclose upon written request any contract under which the plan is established or operated. I would argue that the contract with a broker is a contract under which the plan is operated. Even if you disagree, courts have (maybe) expanded disclosure requirements, particularly upon request. In a 401(k) Plan with participant directed accounts, I'm pretty sure the DOL and the courts would want you to disclose who the broker is when asked. Of course, you don't have to volunteer the names of all plan service providers if no one asks.

You 3d question makes me believe this broker is not an employee, but if she is, held liable for what? If they are a party in interest who participate in the PT, they could be liable for the taxes and penalties. If they are a fiduciary who participate in a breach of fiduciary duty, they could be liable for the breach.

[Scuba 401]

Just a side note. I do not believe a "broker" or Registered Representative is even considered a Fiduciary to the Plan. Look at the AETNA DOL letter and the ERISA Regs 2510.3-21(d)(2). Merely recommending securities for the Plan to purchase does not make one a fiduciary. One of the key determining factors which would make this a prohibited transaction is wheter or not the Broker has discretionary authority. If not then I think it is OK.

[Guest Jeramy P. Lembeck]

Thanks for teh helpful responses!!

In respose to the above statements/questions.

More information...

Yes, the Broker is an employee. This person worked for a financial institution and then went to work for the bank in question. When he (the Broker) took the position as the Benefits Administrator, he convinced the Board to change investment providers and elect him as the Broker of record.

I have many problems with the Board's decision to elect him as the Broker. First, I understand that it is permissable to be a Broker and participate in a plan. But, I have to question every decision and choice he makes. For example, when he changed investment providers, he was paid an up-front commission for the move. He also will be paid the 12b-1 fees and any other commission associated with the plan. The investment company he chose has the highest commission payouts in the industry. I am not say that the invesment company is a bad choice, but I am just questioning the factors behind the decision. Is this for the good of the participants?? Prudent man??

In regards to scuba 401's question, yes, the Broker has discretionary authority.

Last question is what would the remedy be to fix this situation? Change the Broker would be my first guess, but what about fees rendered because of the change in investment providers?

Thanks again for all your help!!

[Guest Jeramy P. Lembeck]

Thanks for the helpful responses!!

In respose to the above statements/questions.

More information...

Yes, the Broker is an employee. This person worked for a financial institution and then went to work for the bank in question. When he (the Broker) took the position as the Benefits Administrator, he convinced the Board to change investment providers and elect him as the Broker of record.

I have many problems with the Board's decision to elect him as the Broker. First, I understand that it is permissable to be a Broker and participate in a plan. But, I have to question every decision and choice he makes. For example, when he changed investment providers, he was paid an up-front commission for the move. He also will be paid the 12b-1 fees and any other commission associated with the plan. The investment company he chose has the highest commission payouts in the industry. I am not say that the invesment company is a bad choice, but I am just questioning the factors behind the decision. Is this for the good of the participants?? Prudent man??

In regards to scuba 401's question, yes, the Broker has discretionary authority.

Last question is what would the remedy be to fix this situation? Change the Broker would be my first guess, but what about fees rendered because of the change in investment providers?

Thanks again for all your help!!

------------------

Respectfully,

Jeramy P. Lembeck

[This message has been edited by Jeramy P. Lembeck (edited 02-07-2000).]

[Scuba 401]

If the broker does in fact have discretionary authority than he is definately a fiduciary. (are you certain he has discretionary authroity? usually brokers do not!) If he is a fiduciary than there may be alot of problems with this situation. first, a fiduciary is only permitted to receive commissions and 12(B)(1)'s if they are fully disclosed and offset against his investment advisory or trustee fee. Otherwise, it is a prohibited transaction for a fiduciary to receive 12(B)(1)'s (soft dollars) Look at the Frost DOL opinion. It is right on point.