Party in interest as broker for plan

[SMB]

"Parent" is the owner of a company which sponsors a profit sharing plan. "Parent" wants to switch plan's investments to "Son", who is a broker. Doable - or a prohibited transaction?

Would appreciate any input and/or references to PTE exemption or prior threads where discussed. Thanks!

[actuarysmith]

Our opinion of this has always been that if the fact of the family relationship is fully disclosed to the participants,there is no problem. (With the caveat that the commissions, fees, asset charges, etc, etc. fall within reasonable boundries ignoring the family relationship.)

[R. Butler]

We have always taken the exact opposite position of Actuarysmith. Our position is based on the fact that a prohibited transaction occurs when a fiduciary causes the plan to engage in a transaction that constitutes the use of plan assets by or for the benefit of a party in interest. We reason that since broker gets a commission or fee the plan assets in effect benefit the broker, in your case a party in interest.

If the investment products that the "son" represents do not perform well in comparison to similar products, you may have a big problem.

[Kirk Maldonado]

R. Butler:

You might want to read Example 6 of DOL Reg. Section 2550.408b-2(f).

[pjkoehler]

Kirk, the reg you cite supports R. Butler's general conclusion, although the PT is of the self-dealing variety under 406(B)(1), rather than the per se variety under 406(a)(1)(D) to which he refers. Actuarysmith would benefit more from reading this reg. because it says that the statutory exemption under ERISA Sec. 408(B)(2) does not apply to a Fiduciary that engages his Son to provide services, even if those services are within the scope of the statutory exemption.

[R. Butler]

Kirk, just to further expound on PJK's conclusion, the reg you site does seem to indicate that 408(B)(6) does not provide an exemption for fiduciaries receiving consideration for their own personal account in connection with a transaction involving the assets of the plan.

I would also point you to 2550.408(B)-2 example 6. It presents an example similar to SMB's situation. The example indicates that a such a situation would be a prohibited transaction.

Even if you do determine that there is not a prohibited transaction, in this situation I would be very concerned that if the assets don't peform well, a participant could present a strong case that there was breach of duty in selecting the company. If Parent participates in the decision to invest with Son you have a problem.

I hope this helps. [Edited by R. Butler on 08-10-2000 at 04:45 PM]

[actuarysmith]

My remarks may have given the wrong flavor of our actual practice as a firm.

We would not encourage a business owner to select a son as the financial advisor - in fact we would strongly advise against it! (for all of the reasons cited in the other replies)

In addition, the performance of the investments, as well as all fees, asset charges, etc. etc. better darn well compare favorably with comparable investment alternatives that might have been oferred.

My comments were meant to imply that if the sponsor was still bent on selecting someone with any relationship to the owner, there better be full disclosure of that fact.

In actual practice, I don't believe that we have ever had the son of an owner act as broker. We have son-in-laws, or cousins.

[KJohnson]

I agree with all the other comments.

However if trustee Parent has co-trustees and trustee Parent abstains from voting on the hiring of Sonny and "absents himself" from all consideration of this issue then you MIGHT be able to argue that there is no PT under the last example of the reg cited by Kirk.

Sonny would still be a party in interest due to relationship with fiduciary trustee Parent, but co-trustees could 408(B)(2) the technical 406(a) PT (assuming reasonable compensation paid to Sonny and everything else required for the statutory exemption) and Parent Trustee would not have "caused" the Plan to do anything in violation of 406(B).

However, be sure to look at the language of 2550.408(B)-2(e)(2). Frankly if Parent trustee is the CEO and he picks subordinates as co-trustees who would dare not cross Parent Trustee's known but unexpresssed wishes it would still "stink" to me.