Can a Plan's Trustee Force Sale of Asset in Segregated Account?

[RestAssured]

This Plan has many participants, each of whom has their own FBO account at a brokerage firm. This plan is considered 404© and a Participant "T" was allowed to invest in shares of a partnership in 2010, using his own balance of course.

Many things have been squirrely with this transaction. For example, when purchased, the shares were titled in "T"s personal name and it took 4 years to get changed. Also, K-1's have just been obtained for all the years, and it took pulling teeth to obtain them. The icing on the crappy cake is that it has come to light that the Partnership owns a bank where T's wife was an officer.

May the Trustee of this Plan "revoke", "recall", or otherwise force the sale of this investment (partnership shares) at this point? I have a feeling there is a Party In Interest here, but I can't decide b/c the PII is not related to the Trustee/Fiduciary of the Plan; she is only related to T.

My client, the Trustee, is highly agitated and understands that he should have done more research on the front end, but what can he do NOW?

Thanks for any and all advice. I've been reading legal-eze until I'm almost nauseated, but I think I'm overlooking something really obvious. Thanks.

[QDROphile]

"I've been reading legal-eze until I'm almost nauseated,"

So puke. What do the plan and trust documents say? And at a minimum you should read ERISA reg. section 404c-1(d), even if it makes you puke some more.

[mbozek]

What does the plan document say about the duties of a fiduciary review investments in the plan for compliance with IRC and ERISA provisions including reporting and disclosure?. Some where in the fid provisions should be language that allows the fiduciary to determine if an investment is permissible under the terms of the plan although I am not sure that it will written in understandable language. Clearly a fid should be able to expunge/sell an investment if it is a PT or could subject the plan admin to a breach of fiduciary duty in allowing an impermissible investment. There is a case called Flahertys arden bowl v. IRS 115 TC 269 (2000) where the tax court held that a self directed investment made by a 401k participant was a PT under the IRS regs even though it was not a PT under the DOL fid rules. Plan should not hold any questionable investments that are suspect under ERISA/IRC without an opinion of counsel. Why not ask the participant to provide a letter from tax counsel stating that this investment does not violate tax or ERISA PT regs and then have plan counsel opine on the letter?

[RestAssured]

QDROphile, I don't know if you were *trying* to be funny by saying I should puke, but it was not funny at all. How silly. I was simply trrying to be light-hearted in saying that I was nauseated. I also went ON to state that I think I've probably overlooked something. I was hoping that my colleagues could give a simple answer, such as mbozek did, as to a new way I could approach this issue. I'm sorry if you're having a bad day; you're typically a big help on these forums but this time you've been 'less than helpful'. No thanks to you.

Mbozek, thank you. The trustee takes full responsibility in not educating himself of the investment before allowing T to invest. "Clearly a fid should be able to expunge/sell an investment if it is a PT or could subject the plan admin to a breach of fiduciary duty in allowing an impermissible investment." <---- I totally agree, no question. Does the fact that T's wife works for the Holding LLC's holding (the bank), make there a PT?

I am pretty sure the Trustee here would love to get rid of the investment, we're just looking for a way to do so legally. Having there be a PT would be the grounds for the riddance of the asset. So the main question comes back to, could this be a PT?

Thanks again Mbozek.

[jpod]

You have to plow through the plan and trust documents, and possibly the 404© notice, but chances are that there is absolutely nothing that would prevent the trustee (or another named fiduciary to whom the authority is reserved) from stepping in and forcing a sale of that asset (although you have to be careful about not selling it in a transaction that results in another PT). The only thing that 404© does is provide protection to the plan fiduciaries; it does not require self-direction to be honored forever.

[QDROphile]

Unembellished constructive comments -

If it turns out that the trustee has no discretionalry authority under plan terms with respect to purchase or sale of plan assets, ERISA 404(a) says that the duty of a fuduciary to follow plan terms extends only to the extent that plan terms are consistent with Titles I and IV of ERISA. The trustee could determine that implementing a PT or allowing a PT to remain uncorrected is not consistent, thereby liberating the trustee from the restrictive plan terms.

This should be an opportunity for the trustee to examine the plan terms in a bigger picture and make sure that the terms proved the authority and powers to allow the trustee to act properly with respect to the respojnsibilites and potential liabilities that the terms impose on the trustee. Among other things, it is uncomfortable not to follow plan terms if justified under ERISA section 404(a).

[RestAssured]

Thank you for your replies.

IS there a PT with the *participant's* spouse's employment at the bank which is an asset of the Holding LLC that said participant owns?

Thanks a million.

[QDROphile]

You would need a lot more facts to decide.

[Mike Preston]

Sure, facts would help. But in the end it may end up being a judgment call. After you get all the facts, remember that the underlying principle is whether or not a PII received an advantage. In this context an advantage to T's wife could be construed as an advantage to T merely because of the marriage. And T's wife being an officer greatly expands the universe of what might be considered an advantage.

If it smells like a duck.........

[ESOP Guy]

I would suggest it might not require a PT for the trustee to act.

Two examples I have seen and as far as I could ever tell (i was an observer not in all the meetings) even of 404c the trustee has an obligation to make sure the investment is suitable and so forth.

I once belonged to a 401(k) plan that had self directed brokerage account. You couldn't buy the pink sheet stocks some kinds of thinly traded preferred stocks. As far as I could tell the trustee with the brokers help had decided these investments weren't suitable.

I also once saw a small dentist practice that allowed all the employees to have a brokerage account so the dentist could. The CPA firm I worked for after reviewing all this as part of their investment advisory practice made changes. One of the changes they made was force one of the dentist's employees diversify. She had put 100% of her retirement funds in Ford stock. (odd thing was she made great money-- she had bought near the bottom in the 2008/2009 time frame. It didn't change the fact she had put all her eggs in one basket.)

In that case I know the justification was even under 404c people felt the investments offered were not suitable.

404c isn't a blanket coverage the that says the trustee can't be called out. I know they have to look at the people's choices and decided the choices are in the universe of suitable choices.

Can a case be made this partnership isn't a suitable choice?

Just to be clear this part of retirement law isn't may strongest area of knowledge but the above is my first reaction to this question. I give the advice as something to look into more then saying I think I can win a legal case.

[QDROphile]

I disagree with the suggestions and implications in the next preceding post relating to ERISA section 404© except for the need to look into.

[RestAssured]

Thank you ESOPguy. I think this situation is above my pay grade as well. I may spring for an hour's consultation with an attorney, though. I don't want to lose a profitable client because I don't seem confident in this matter.

I appreciate everyone's thoughts and replies. Even you QDROphile.

[david rigby]

I may spring for an hour's consultation with an attorney, though.

Methinks you should expect the attorney to suggest the situation is bigger than an hour's time

[QDROphile]

Yes, there is a lot of chemistry and biology involved in "smells like a duck." Then there is the administrative question about whether or not the trustee is licensed to hunt ducks.

[RestAssured]

Yeah, I know an hour is wishful thinking.... silly me

My main objective is to give the trustee confidence in either decision, keeping the stinky asset or forcing its sale. Read: confidence in ME so I don't lose a client. Because we all know that no matter what the situation, the TPA gets thrown out. At least it's happened to me...