Plan Disqualification - Investment Elections Not Following Participant Election

[401kAllTheWay]

Where or what details can be provided by ERISA guidance that say allocations must be deposited into the investment election that the participant chose or was defaulted too? I know this is a Plan Failure but does it disqualify the Plan? 
example - company provides small catch up profit sharing contribution. It was requested for these funds to be deposited into specific accounts that do not follow the QIDA. 

[C. B. Zeller]

To comply with ERISA 404(c), participants must have an opportunity to exercise control over the investment of their accounts. Failure to offer that opportunity does not result in disqualification since it is not part of the tax code, but it could result in loss of relief of co-fiduciary liability for the plan's other fiduciaries.

If the plan document says that participants will be given the right to direct the investments in their account, then failure to follow the plan document is an operational failure that is potentially disqualifying.

The right to direct investments is considered a benefit, right or feature that must be available to participants on a nondiscriminatory basis. If HCEs have the right to direct their investments but NHCEs don't, you could have a 401(a)(4) violation, which is disqualifying.

That aside, what is a "catch up profit sharing contribution?" And when you say "It was requested for these funds to be deposited into specific accounts" - requested by whom, and what accounts? The plan doesn't have to let participants invest in anything under the sun; in fact, it would probably not be prudent to do so. The plan can restrict the participants' options to a menu of investment alternatives.

[401kAllTheWay]

Thank you for replying. This is very helpful detail as I was trying to sort through where the fiduciary liability could be. 
The Plan has self directed brokerage accounts in which some team members have specific investment elections for each source in the Plan. It was requested to bypass whatever investment election option was defaulted or elected by participants  and to just move directly to their SDB but only for specific participants. Almost like, can you do one thing for this population  and another for your other population of participants. I should add this was not requested by the Plan Sponsor or anyone who can actually make decisions for the Plan.
Said individual  actually did not go to the Plan Sponsor and went to the record keeper themselves to ask for this to happen. They are affiliated with the Plan due to the advisor/investment relationship but have no decision making when it comes to the over 401(k) Plan. 

[Lou S.]

I don't know if we have enough info to fully comment on this but it sounds to my non attorney ears that this individual has become a Plan Fiduciary, exercising control over plan assets, whether they wanted to be or not.

[401kAllTheWay]

I can confirm they are not the Plan Fiduciary or anywhere listed in the AA, Amendments, Service Agreements to make decisions for the Plan. They are not an authorized signer of the Plan either.

I personally believe they are on a power trip  knowing that they hold a lot of knowledge around advising clients on their retirement. What they do not know is our record keeper comes to us about everything they are doing behind the scenes and how much trouble they are causing. They only know the advising clients who have a 401(k) account side vs. administering the Plan. 

[Paul I]

12 minutes ago, 401kAllTheWay said:

they are on a power trip  knowing that they hold a lot of knowledge around advising clients

They may hold a lot of knowledge but apparently they don't know they became a fiduciary by virtue of their actions.  This is worth pointing out to the plan's named fiduciaries (plan administrator, trustee...) that there is a rogue fiduciary in their midst.

[401kAllTheWay]

Just to confirm - because they are asking Plan related questions to our record keeper, they are now part of our fiduciary? They have no sort of decision making and we would like to keep it that way.

This is why I thought them going rogue would cause some sort of disqualification in the Plan if our record keeper listened to them. 

[Paul I]

If the individual is making decisions about where to invest contributions to the plan, and the plan says that right belongs to the participant, they are acting as a fiduciary.  They can ask questions.  They cannot instruct the investment.  If the recordkeeper is asking whether the recordkeeper should listen to this individual about what to do with other participants' money, the answer is no.

[Bird]

17 hours ago, 401kAllTheWay said:

It was requested to bypass whatever investment election option was defaulted or elected by participants  and to just move directly to their SDB but only for specific participants. Almost like, can you do one thing for this population  and another for your other population of participants. I should add this was not requested by the Plan Sponsor or anyone who can actually make decisions for the Plan.
Said individual  actually did not go to the Plan Sponsor and went to the record keeper themselves to ask for this to happen.

Above you said they asked for it to happen, which would make them a fiduciary, if the actions are completed. Below you say they are (just) asking questions, which would not.

14 hours ago, 401kAllTheWay said:

Just to confirm - because they are asking Plan related questions to our record keeper, they are now part of our fiduciary?

 

[401kAllTheWay]

My apologies on the wording. I did not mean to cause confusion.

It was requested to the record keeper but not on behalf of the Plan Sponsor or authorized singer of the Plan. This rogue advisor made the request which from my understanding, changing the default investment fund for specific participants would have benefited our HCEs and would not follow our QDIA. 

Just wanted to make sure that I understood because of the wording used with QDIA. Just trying to learn where and how to interpret the rulings. 

[Paul I]

401kAllTheWay, no apologies needed for posting here.  The BL community helps sort things out.

The challenge you faced was the advisor speaking directly with the recordkeeper. This apparently was done without the knowledge of the plan representatives.  The good news is the recordkeeper brought this to light and did not act on the suggestions of the advisor.

I would suggest taking 2 steps to close out the incident.  The first is to let the recordkeeper know they did the right thing to let the plan know what was being asked of them.  Positive feedback strengthens your relationship and makes them comfortable approaching you when something seems out of line.

The second is to let the advisor that if the advisor wishes to do business with the plan, the advisor should ask keep the plan representatives informed in advance and possibly even get their approval before engaging with other service providers.

Good luck, and we hope to see more of you on BL!

[Bird]

13 hours ago, 401kAllTheWay said:

My apologies on the wording. I did not mean to cause confusion.

It was requested to the record keeper but not on behalf of the Plan Sponsor or authorized singer of the Plan. This rogue advisor made the request which from my understanding, changing the default investment fund for specific participants would have benefited our HCEs and would not follow our QDIA. 

Just wanted to make sure that I understood because of the wording used with QDIA. Just trying to learn where and how to interpret the rulings. 

Not too big of a deal on the wording but...we work in a business where precision is hugely important, and short-cutting descriptions here sometimes leads to confusion or worse - incorrect conclusions based on bad facts.

My take on this is that the advisor is "working with" certain participants more closely than others, likely HCEs because they probably have more money, and (I'm guessing) these participants agreed with whatever s/he suggested. Most recordkeepers have restrictions on what advisors can change, for fiduciary reasons discussed here, and the system worked. The advisor "just" didn't understand how the system works (not shocking). It's a little weird that s/he would zero in on a small contribution but probably just acting important.