Basic questions on permitting "aggressive" investments

[Santo Gold]

A plan sponsor asked their financial advisor (who in turned asked me) about possibly permitting what may be a REIT in the 401k plan.  The plan is a pooled asset plan with trustee, not employee direction.  The plan sponsor/trustee I believe wants to invest a significant amount into this new investment.

The plan document does not have any restrictions on investments.  The owner who is pushing for this is over age 70.

I want to give them some possible downsides.  Risky investments beyond retirement age would be one.  So would possibly investing in a high risk investment that could negatively impact participant balances.  Although a small plan (around 15 participants), This could be considered a non-qualifying asset and trigger an annual audit.  

Any other obvious matters to point out?

Thank you

[Bill Presson]

Yuck. Tell him to roll his own money to an IRA and make the investment and not taint the plan.

[C. B. Zeller]

They can still be exempt from an audit if they increase the amount of the bond.

How liquid is this investment? Will there be enough liquid assets in the plan after investing in this security to be able to pay cash distributions to terminating participants, and the owner's upcoming RMDs?

The bigger issue though is fiduciary duty. Remember that the fiduciary must act solely in the interest of the participants and beneficiaries of the plan, and in the exclusive interest of providing benefits and defraying reasonable costs. And they must do so in the manner of a prudent person familiar with such matters.

I would encourage this sponsor to review, with their lawyer's input, their duties under ERISA 404 and DOL reg. 2550.404a-1.

If, after reviewing their duties, they still feel that it would be prudent for the plan to make this investment, then by all means proceed. Just be prepared to justify the decision to the participants (and their attorneys) if the investment goes poorly.

[msmith]

Santo - if you are just the TPA, you should not be providing any investment advice, as to whether or not it is a good investment for the Plan - as a whole. That is the F/A's job. You can comment on the bonding issue.

[Bird]

15 hours ago, msmith said:

Santo - if you are just the TPA, you should not be providing any investment advice, as to whether or not it is a good investment for the Plan - as a whole. That is the F/A's job. You can comment on the bonding issue.

I agree that the TPA should not be providing investment advice, but there's potentially* a lot more non-investment advice to be provided, other than "you need to get a bigger bond." If that's all you say then the advisor will tell the sponsor that you said it is ok and it only costs a little bit more for bonding, and they'll buy it and then you and they have to deal with the other issues - liquidity, valuation, etc.

*If this is a publicly-traded REIT then our typical concerns about real estate may not apply.

[FPGuy]

"May be a REIT"? Figuring out what it is, its liquidity (note that a publicly traded fund could be an interval fund which has limited liquidity), its current and ongoing valuation, and UBTI would seem to me to be primary concerns in probably that order. And the more it represents as a percentage of plan assets the more pressing the answers.

[Kansas401k]

Is there an IPS (Investment Policy Statement)? All of our plans have an IPS which plainly states what type of investments are and are not allowed. Might be good practice to add one even if you do talk the owner into rolling out and investing in this asset in his IRA.