Prohibited Transaction? Son as broker?

[Dawn Hafner]

From my reference materials, the use of a spouse or child as a broker on either a self-directed IRA or a self-directed brokerage account in a qualified plan would be a prohibited transaction. I think PTCE 97-11 might make this situation OK for an IRA or self-employed plan, but what are the reduced cost services? Can any fees be charged in this situation?

This plan is not a self-employed plan and it allows self-directed brokerage accounts. An employee who is a stockholder in a C corp wants to move his account to his son who is a broker. As far as I can see this is at least a prohibited transaction under self-dealing. Does anyone have any good cites for this situation?

[pjkoehler]

I think you're right that a fiduciary that exercises the discretion that makes it a fiduciary to cause the plan to enter into a transaction in which his lineal descendent has a financial interest, probably engages in self-dealing-type PT under ERISA Sec. 406(B), in the absence of an applicable exemption. However, one of the advantages of an ERISA Sec. 404© Plan is that a participant that excerises independent investment control over the assets of his account "shall not be deemed to be a fiduciary by reason of such exercise." ERISA Sec. 404©(1)(A). It may be argued that the right to determine the brokerage firm merely expands the scope of the participant's independent investment control over the assets in his or her account and, therefore, that the participant's choice of broker is not a fiduciary act. See 29 CFR Sec. 2550.404c-1(d)(1). An investment that is not the result of a fiduciary act cannot, on its face, be a self-dealing form of PT.