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multiple SIMPLE vendors?

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Let me start by saying that I don't work on SIMPLEs - this was a call I took from a desperate advisor, and while I told the advisor that I don't know the answer (and he is now going to check with the company's accountant), now I am genuinely curious...

A small business has a SIMPLE, and all participants have signed on to have their SIMPLE accounts through one financial firm (let's say Merrill Lynch).  Now one participant brings in paperwork that says he wants to open his SIMPLE account somewhere else instead.  Does the plan sponsor have the authority to limit where the accounts are?  From what I can see, I don't think so, unless maybe the SIMPLE document is specifically a SIMPLE document from ML that specifies that all accounts will be held there... and even then, I'm not sure that would hold up.  Am I even in the right ballpark?

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There are 2 flavors of SIMPLE IRAs, those using a "Designated Financial Institution" or DFI (see IRS Form 5305-SIMPLE) and those not using a DFI (see IRS Form 5304-SIMPLE).

When the financial institution  (ML in your example) agrees to be a DFI then the employer can require that all contributions must go to ML SIMPLE IRA accounts which obviously avoids the hassle of the having to send contributions to multiple institutions.

However, when the investment institution won't agree to be the DFI (most won't accept the extra obligations imposed on DFIs) then the employees have the absolute right to open their SIMPLE IRA investment account anywhere they want. This "right" is never mentioned during the enrollment process and as a practical matter the EEs are led to believe that if they want to participate they must open their accounts with the advisor doing the enrollment.

Even where a DFI exists and all contributions initially go into the accounts with the DFI the EEs also have the right to transfer the amounts to a different SIMPLE IRA at any time and "without any cost or penalty to the participant". 

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