Former Partner as Trustee

[austin3515]

Have a plan with 3 partners. The 3 partners don't want to be responsible for the investment decisions of the other two. What's more, they don't want the other partner listed as the "account owner" (these are brokerage accounts) on what is for each of them a very substantial balance. So we have each partner listed as trustee of their own personal accounts, and just one of the partners serves as Trustee for the other employees.

It just so happens that one of the other employees who is semi-retired is the founder of the partnership, and he also wanted the same set up (i.e., trustee of his own account). This person obviously has a lot of clout and the 3 partners for political reasons do not want to say no.

There are no rules regarding who can serve as Trustee - any one have a problem with this?

[Peter Gulia]

austin3515, a few ideas for you to think about:

Staff of the Employee Benefits Security Administration have unofficially expressed a distaste for a plan design under which each participant would serve as trustee of his or her account.

See, for example, Q&A 10 in http://www.americanbar.org/content/dam/aba/migrated/jceb/2007/2007dol.authcheckdam.pdf

Consider whether anything in the plan, a trust or subtrust, or an allocation of responsibilities would lead the Internal Revenue Service to question whether the plan is “established” or “maintained” by the employer.

Consider whether a change in the plan or trust documents is one that calls for refreshing the plan’s IRS determination letter.

If one or more of the participants permitted to avoid having another person serve as trustee for his or her account is a highly-compensated employee, and the plan denies this opportunity to a nonhighly-compensated employee, consider whether the circumstances of these trusteeships involve a feature that is a subject of a nondiscrimination rule, whether under IRC § 401(a)(4) or something else.

If the fiduciaries decide (or the plan’s sponsor decides) to allow what’s asked, do a thorough criminal-background check on the participant to meet ERISA section 411.

[austin3515]

_{I do not think being a Trustee is a BRF. There is a literally nothing that a trustee can do that the participant cannot.}

[Peter Gulia]

FWIW, I think a plan design of each-participant-is-a-trustee is not contrary to ERISA's Title I.

Before accepting a trusteeship, a participant might consider that a fiduciary who has knowledge of another fiduciary's breach has some responsibility to prevent, correct, or remedy a co-fiduciary's breach.

[Bird]

I've heard of setting up separate plans so each partner could be trustee of his or her plan, with another plan for the employees...basically allowing self direction for the partners without saying it. I've never seen or heard of this arrangement within a single plan. It's not responsive to your question but I wouldn't do it this way at all.

[Peter Gulia]

There is another reason to consider the design that Bird describes - a separate plan and trust for each individual who will serve as trustee for just the one participant's account. ERISA section 405 co-fiduciary responsibility applies only regarding fiduciaries who serve the same plan (or trust).

Also, an advantage or disadvantage (turning on one's perspectives and tastes) is that a plan for which the only participant is also his or her employer might be governed by State law rather than ERISA.

While a separate plan and trust for the founder (if he is not his employer) might be governed by ERISA, the one participant is the one who can enforce the trustee's responsibility.

[austin3515]

There's something like 10 other employees and no one has any intention of making them Trustees. So what I'm hearing is that no one really has a problem with this set-up?

[movedon]

So what I'm hearing is that you are acknowledging that everyone who has responded has a problem with this set-up?

[austin3515]

OK, I guess I didn't read Bird's closely enough. It seems to me that expressly because it can be done with 4 plans it should be able to be done with 1 plan. That takes nondiscrimination off the table altogether because clearly the right to be a trustee is not as valuable as the right to be a trustee AND have one's own plan.

But I don't understand how merely delegating the responsibilities of the Trustees (which is a very routine aspect of Trustees/Fiduciaries) creates a problem. The Employer has the discretion to delegate responsibilities among the Trustees. What in particular is problematic about delegating them in this manner? Would it be more appealing if Owner Steve was the Trustee of Owner Bob's account? It should not be, in my opinion anyway.

How about if Owner Steve was Trustee over not only his own account but the accounts of those employees in his division, and the same for Bob and his division?

[Bird]

Maybe I wasn't clear but I was mostly concerned about the fact that you are effectively letting the owners self-direct and not letting the other participants self-direct. Or did I mis-read it?

I'm not sure I fully understand the concerns that each partner has about "being responsible" for the decisions of the others. In my practice, I'd rather address those concerns, which I believe are phantom.

It seems to me that expressly because it can be done with 4 plans it should be able to be done with 1 plan.

I've heard that argument used, even by the IRS, to justify regulatory changes. But I don't remember them using it in this context. I could be wrong. I've never used the "one plan for each owner" design because I couldn't justify the fees involved, and/or didn't want to adjust my fees to make it possible.

I'm not sure about the issue of delegating the responsibilities of the trustee. That doesn't sound totally unreasonable, but it's not something I would want to do and am not comfortable giving an opinion on it.

[austin3515]

_{Maybe I wasn't clear but I was mostly concerned about the fact that you are effectively letting the owners self-direct and not letting the other participants self-direct. Or did I mis-read it?}

_{Everyone in the plan has the same opportunity to direct their own investments.}

_{I'm not sure I fully understand the concerns that each partner has about "being responsible" for the decisions of the others. In my practice, I'd rather address those concerns, which I believe are phantom.}

_{I don't think there are any unusual trust (Webster definition) issues here. Owner C who has $1,000,000 dollars a) does not want a statement saying that his Million is owned by someone other than himself and b) does not want to be responsible for the investment losses in any event for Owner B's investment decisions on his million. Both seem like perfectly rational motivations.}

_{I've never used the "one plan for each owner" design because I couldn't justify the fees involved, and/or didn't want to adjust my fees to make it possible.}

_{On this we agree!!}

_{I'm not sure about the issue of delegating the responsibilities of the trustee. That doesn't sound totally unreasonable, but it's not something I would want to do and am not comfortable giving an opinion on it}

_{It seems strange to be uncomfortable with this delegation but not the individual plan strategy which as far as I am concerned is three steps past a delegation of responsibilities. Is there a rule or some guideline or even principle that I am violating?}

[Peter Gulia]

If you're providing for several trusts and trustees under one plan, does your prototype or volume-submitter adoption agreement allow enough choice to specify the details?

[Bird]

OK, glad to hear that others could self-direct if they wanted to.

I'm still not sure why one partner would think that having another partner's name on a statement as trustee means anything significant; that's just the way it is done. I think this is all something that should be clarified at the investment company level. I wouldn't want to muck up my documents (basically what Fiduciary Guidance Counsel is asking) to satisfy someone's incorrect perception.

[austin3515]

The document thing made me think, and I checked w/ Corbel and they said I should be able to do what I'm trying to on our VS.

[K2retire]

Owner C who has $1,000,000 dollars a) does not want a statement saying that his Million is owned by someone other than himself

But it is owned by someone other than himself -- it is owned by the plan and its trust.

[austin3515]

The finer points of trust-law do little to assuage this rationale individuals superficial concerns.

[Peter Gulia]

austin3515, one way you might lower your liability risks on what your client asked you is to persuade your client to file a Form 5307 to request the Internal Revenue Service's determination that, even with a minor modification from the volume-submitter documents, the plan is tax-qualified in form. The $300 user fee and a fee for your time on the Form 5307 submission together might be less expensive than your written advice otherwise might be.