Insurance Contracts / Trust Exemption

[austin3515]

Once upon a time I had heard that if a 401k plan has loans, it had to have a trust/trustee to "hold" the loans. Is this true? Or can any plan funded exclusively by insurance contracts claim exemption from the Trust Requirement?

[jpod]

I'm not familiar with that, but I do recall another conundrum. The law is pretty clear that a 403(b)(7) custodial account can invest ONLY in mutual funds. So, that leads to the question: "what about loans"? The IRS long ago came up with some explanation which I can't remember saying that loans were permitted, even though a loan is an investment (technically) and a loan is not a mutual fund.

[austin3515]

Any other takers on this? I'm considering making it standard policy in our office to indicate that the plan is exempt from the trust requirement because it is funded exclusively w/ insurance contracts (Great West, John Hancock, etc). For whatever reason we have always insisted on trustees (not that it was ever questioned!)

[Bird]

Just curious; what is the reasoning behind this and how do you do it? Our documents call for a trustee, no exceptions. Isn't the person/entity choosing the investment platform every bit as responsible as the trustee would be?

[austin3515]

Who is your document provider? We use Corbel, and it's right in the "trustee" section.

"Isn't the person/entity choosing the investment platform every bit as responsible as the trustee would be?"

The fiduciary is responsible, and I suppose you could let the courts sort all that out if it ever came to it. If it were me, I would prefer to not be a "trustee" anyway. Especially in a larger organization where it might not be so easy to pick that special someone

[Bird]

Who is your document provider?

Fort William. There might be something available in another form of document.

[austin3515]

I was just told by GW that they insist on a trustee regardless. I wouldn't be surprised if many of the others have the same policy.