Correction of investment errors

[Carol V. Calhoun]

Does anyone have experience with what IRS will accept as a correction when participants were offered investment options that the plan document did not permit?

Situation is that participants were allowed to self-direct their own accounts. The trust document specifically said that they could not self-direct to a limited partnership. The trustee nevertheless permitted participants to do this.

The failure is probably not "significant," and even if it were, we're probably within the time for correcting a significant operational failure, so we should be able to use SCP. However, even under SCP, we're supposed to correct the failure. And we have no idea how to do this.

IRS guidance says that amending the plan to retroactively cause it to reflect what was actually done is available only in three specific situations, none of which is this one. So presumably, we're supposed to retroactively take these people out of the limited partnerships. But how would we even do this? Presumably, they would argue that but for being allowed to invest in the limited partnerships, they would have invested in whatever, with 20/20 hindsight, has proved to be the most favorable option. But if the employer makes a contribution equal to the income they "lost" by not being in the most favorable option, that contribution would go to the most highly compensated employees (because they were the ones most likely to choose the limited partnership option), which doesn't sound right. But if we retroactively put them in the default option, I'm concerned with a 404© or other ERISA violation (not to mention, severely ticked off employees if that is less favorable than the limited partnerships).

Any other options? Or has anyone had a failure that was significant enough and had gone on long enough that they had to go in under VCP, and thus gotten some IRS guidance on how to fix this?