Benefits Rights Features

[Nancy D]

Hi all,

I have a plan where the Sponsor wants to allow participants to invest in managed accounts, but only to those who have an account balance of $300,000 or more. Has anyone seen this in a plan? Does anyone know of any guidance on this issue?

Thanks in advance for any help.

[ESOP Guy]

This strikes me as a violation of the benefits/rights/features rules. You would have to test this every year to see if make sure HCEs were not benefiting more than NHCEs.

I am NOT endorsing this, but throwing this idea out for comment.

I once saw a plan that wanted to do what is being proposed. Instead of using balance they did it via a backdoor. The plan administrator went to his TPA, the firm I worked for at the time, and asked how much would the TPA charge extra for each brokerage account added to the plan. My boss said $500/year/brokerage account. They amended the plan to say if you want a brokerage account you had to pay the $500/year added cost. The plan administrator figured he could even add to his defense why should everyone pay for just some people’s desire to have this extra feature. By the way most of the plan fees were paid by the plan.

The net effect of this is only people with very large balances were going to ever pay $500/year in additional fees.

My boss thought this was a great idea. I had a 401(k) account that allowed brokerage accounts, but they only charged $50/year extra.

I think this might work, but I have never decided 100% if this is a good way to do what is desired. Namely, only allow people with large accounts have self-directed brokerage accounts.

[QNPG]

Hi all,

I have a plan where the Sponsor wants to allow participants to invest in managed accounts, but only to those who have an account balance of $300,000 or more. Has anyone seen this in a plan? Does anyone know of any guidance on this issue?

Thanks in advance for any help.

I agree with ESOPguy. Definitely a BRF issue.

[Nancy D]

Thanks all for your help. It raised my hackles (too much time with my dogs), and I appreciate the confirmation.

[John Feldt ERPA CPC QPA]

Find out who really wants to do this and perhaps those folks are already eligible for an in-service distribution and they should exercise that option to move their money out of the plan. No problem there.

Otherwise, if the HCE that wants this is willing to pay a modest extra TPA fee, then set up a new trustee-directed plan that only covers that HCE and that HCE is named as the trustee of that new plan. Everyone else stays in the existing plan which is participant-directed.

Combine them for coverage testing. No problem with the right to direct investments, because the only one not allowed to self-direct is the HCE (their account is trustee-directed).

Downside is 2 plans, but upside is no BRF issues.

[Bird]

Definitely a BRF issue as it is presented, with the sponsor dictating the $ threshold. But (if I remember correctly) if a plan investment option has an external minimum requirement not imposed by the plan, that is ok. So it depends on exactly how this is presented and set up.

[John Feldt ERPA CPC QPA]

So if the plan sponsor/fiduciary decides to allow an investment option in the plan knowing that the outside vendor only allows it for participant balances over $300,000, are you saying that perhaps the decision by the sponsor/fiduciary is not discriminatory, as long as the 300k requirement is a vendor requirement, not a requirement in the plan's written requirements?

[Bird]

So if the plan sponsor/fiduciary decides to allow an investment option in the plan knowing that the outside vendor only allows it for participant balances over $300,000, are you saying that perhaps the decision by the sponsor/fiduciary is not discriminatory, as long as the 300k requirement is a vendor requirement, not a requirement in the plan's written requirements?

I believe that is correct. I think it was posed to the IRS in something informal like a Q&A but really can't swear to it.

[Bill Presson]

Definitely a BRF issue as it is presented, with the sponsor dictating the $ threshold. But (if I remember correctly) if a plan investment option has an external minimum requirement not imposed by the plan, that is ok. So it depends on exactly how this is presented and set up.

I have the same recollection, but can't find it anywhere.

[Tom Poje]

my search through what files I have saved yields the following comments fron the ASPPA Conferences

2002

q 5. If a 401(k) Profit Sharing Plan uses an individual funding vehicle with a $2,000 threshold and the business owners are able to

immediately move into this funding vehicle that had multiple investment options, but non-owners with smaller 401(k) contributions are in a

pooled money market until they reach the $2000 threshold, is this discriminatory? What if the threshold is $10,000? $25,000?

$100,000?

This is a benefits, rights and features issue and, depending on the facts, could either pass or fail.

q 6. Is it okay to restrict Individual Brokerage Accounts to participants that are 100% vested in all accounts? Is this a BRF problem /

issue?

See question 5 above. This would be acceptable if you pass the BRF test.

2006

24. A 401(k) plan allows participant to direct investments from the funds selected by

the Trustees. An HCE wants to invest in a fund that the Trustees have not

included in the list of funds available. The HCE wants to add this fund but limit

the availability to only that HCE as an investment option. Is it permissible for the

plan to exclude all other participants from investing in this "new" investment?

Answer: No.

What if the fund will be available to everyone in the plan but has an initial

investment requirement of $100,000?

(No answer provided)

..........

my own feelings is that it smells bad. 'effectively', (which is a facts and circumstances test) how many people have balances above $300,000 and therefore could take advantage of having a managed account? If you had other managed accounts with a lower threshold that others could take advantage of I think you might have a different issue.

[Nancy D]

Thank you all for your help on this issue. I appreciate the thoughtful responses and guidance.