May a participant in a 401(k) purchase covered calls?

[Guest Edward McElroy]

A participant in a 401(k) plan that provides for self-direction is interested in purchasing covered calls. Is this permissible? I know of the UBTI issue for the plan as a whole, but thought that only applied if plan didn't provide for self-direction. Any thoughts? Thanks. Ed

[Kirk Maldonado]

What is the basis for your opinion?

[LCARUSI]

Ed -

I think it will depend on the policy of the individual service providers. They should allow it since it is a conservative/hedging strategy. However, some might have a blanket prohobition on all option activity.

I don't understand why UBTI figures into this discussion.

[IRC401]

The issue is whether there is unrelated debt financed income. The issue exists regardless of whether the investment decision is made by the trustee or the participant.

If the plan is going to permit this sort of transaction, the administrator needs to consider who is going to pay for increased admin costs. If the plan is large enough to need to be audited, you should check if this type of activity will cause an increase in audit fees.