Investment Options

[austin3515]

Got a 457b "funded" w/ brokerage accounts. Am I correct that the board really ought to be approving a menu of funds? I assume it would be ill advised to let the execs trade in anything they choose? I had one other 457b plan this way and that's what the attorney recommended. I wasn't sure if that was a rule or a good recommendation or what.

[EPCRSGuru]

I have the same question! We are a not-for-profit 457(b) plan receiving pressure from some employees to add a brokerage option to our menu of selected mutual funds.

[XTitan]

So when does "funded" become funded? Not a lot of guidance, but self-directed brokerage accounts may give the appearance that the company has turned over investment control of a bucket of corporate assets to plan participants. Is that enough to cause the plan to lose its unfunded status? That's a risk/legal question for counsel.

[mbozek]

Non profit 457b plan are exempt from the fiduciary provisions of ERISA. Why would employer want to take fiduciary risk in creating an approved list of funds? The 457b is analogous to IRA investment selection.

Adding a brokerage option will create a different level of risk for the employer since the account will have to be in the employer's name and the employer will be subject to any and all tax and investment/ compliance consequences of employee's investments, e.g., if employee invests in master limited partnership or other pass through investment that generates UBIT tax the NP employer will be responsible for filing 990-T and paying UBIT. I would say no to directed brokerage in 457b.

[jpod]

They are only exempt from ERISA fiduciary rules (and 5500 reporting, etc.) if they top hat plans, which among other things requires they be "unfunded."

[mbozek]

NP 457b plans are unfunded because the assets are subject to the claims of the employer's creditors.

[jpod]

That's the tax standard for concluding that it is unfunded, but it's not the Title I standard.

[austin3515]

mbozek, your two paragraphs seem contradictory. On the one hand you indicate "why impose any restrictions" but on the other you list out some excellent reasons. For example, some employers may wish to have all investments funded through annuities to avoid current taxation. And of course certain types of investmetns should be banned altogether, such as the ones you mentioned. Is that so much different from having an approved list?

And if it is exempt from fiduciary rules, why is there anything to worry about in that regard?

[mbozek]

No, they are not contradictory. I am discussing two different legal questions. First why should plan sponsor be approving investments in a NQ plan when there is no fiduciary responsibility? Second, some investments should not be allowed because of risk to the employer, e.g., UBIT which would have to be paid by employer. I always recommend that 401k plans prohibit certain investments such as FX trading, and options which requires margin account, MLPs and mortgage REITs for UBIT because they have risk under IRC. Same for 457b plans.

[XTitan]

Non-tax-qualified corporate owned annuities are subject to current taxation, though I've always wondered whether they are arae treated as UBTI.