Outside Assets (Golf Equity Membership)

[PainPA]

Have a standard 401k plan whereby a trustee is asking for the availabilty to purchase an equity membership in a golf course with his participant allocations.

How do I shoot this down or accomodate?

What are some of the pitfalls?

[masteff]

Is he wanting to play a few rounds w/ Bernie Madoff?

I'm no expert on PTs but I don't see any way that wouldn't be a prohibited transaction.

You could provide him with these links:

http://www.irs.gov/retirement/article/0,,id=163722,00.html

http://www.dol.gov/ebsa/publications/fiduc...onsibility.html

[mbozek]

Have a standard 401k plan whereby a trustee is asking for the availabilty to purchase an equity membership in a golf course with his participant allocations.

How do I shoot this down or accomodate?

What are some of the pitfalls?

short answer is its a prohibited transaction b/c he is using his account balance in the plan to benefit his personal account, i.e., to play golf. Only way it would not be a PT is if trustee never uses the golf course or never participates in any activity at the course, such social events, parties, etc.

[QDROphile]

Making a lot of assumptions about what an equity membership means:

To the extent the membership has any personal privileges or benefits, such as use of facilities, no plan participant or fiduciary can use them. The "member" will have to sit it out and do nothing while waiting to sell the membership. The need to enforce the restriction might be a stopper -- how will that be done and who will do it? Also, I suspect that there will be periodic or extraordinary fees and expenses that must be paid from plan asets from time to time and no income generation from the asset in the interim. I am not even touching on liquidity considerations. Handling such an investment properly is just so impractical that the investment is effectively not feasible, and no fiduciary should allow it, even in a section 404© environment. When inquiries come in about investment in vacation property, the discovery of restrictions on personal use is usually enough to put an end to the idea.

[ESOP Guy]

I would add if you read a plan document it requires the plan administrator to determine the fair value of assets so he can allocate all earnings including unrealized gain/losses.

I don’t see how they will do this. Maybe it doesn’t matter as he isn’t affecting anyone’s balance but his own. But I think a case can be made he isn’t following the document without a rational way to value the assets from year to year.

If this is a 5500-SF or 5500 one would have to mark the question on the assets portion of the form that the plan has assets that are not being valued by an independent appraiser or a market. You might want to mention that is an audit risk. Ok, maybe not a large risk, but you are looking for a way to discourage this idea—so don’t mention size of risk.

Lastly, if one doesn’t have a good value of the assets how does one determine loan limits, if plan allows loans? What if a QDRO comes along? What if he dies and the heirs want the money? There are those practical issues.