Conversion held hostage by a participant

[JohnEPNFP]

So hopefully I got your attention.   A medical practice agreed to convert their plan from RK A to RK B.  The plan has several self-directed brokerage accounts that are offered through RK As recordkeeping system so everything is (was) working fine.  Upon notification that the plan was leaving RK A told the Plan Sponsor that all assets in the SDAs would need to be liquidated and the cash transferred to the core accounts to then be liquidated and transferred to RK B.  Dr. X, who is a partner / member / owner, but not a majority owner, refused to liquidate his positions because he has a specific Russian ETF that is illiquid and represents a $250k unrealized loss. The fund is actually in the process of being liquidated by the fund company, but there is no known timeframe for when this process will end.  The Plan Sponsor still wants to convert from RK A to RK B but is at a standstill due to Dr X's refusal to liquidate his account.  Dr. X is not eligible for in-service withdrawals so he can't distribute in-kind shares to an IRA.  We have politely told him that he is potentially creating a fiduciary issue since he is taking his personal account into consideration and not doing what is in best interest of plan and other participants.  Can anyone chime in with thoughts on how to proceed? If at all?  Maybe I shouldn't want this plan, but the rest of the decision makers are great and they are VERY frustrated with Dr. X.

[Bri]

Track it separately and manually adjust whatever reports you get from RK B?

[Paul I]

I agree with @Bri and suggest that Dr. X or his plan account pay the fee for the additional work.

[Lou S.]

You seem to have a few options.

1 - Let him keep it. track it separately. Bill accordingly and be aware you may have a BRF issue if he's the only one allowed to do it.

2 - Have the other Trustees force a sale to move the conversion along. Know that this may or may not cause the participant to start a lawsuit against the other fiduciaries who force the sale.

3- Walk away and keep the plan at RK A.

4 - Does BKB have a SDB option where the assets could be transferred in kind?

Other people may have other ideas for you.

[Bill Presson]

Participants may have the ability to make trades in accounts but they aren’t the “owner” of the account, the trustees are. 
 

The trustees have the ability to liquidate whatever account they want. If they haven’t done so, it’s on them. 

[austin3515]

it makes no sense to me that they are not doing an ACAT transfer for the brokerage accounts.  Someone might have hundreds of positions in their account. I have never heard of these accounts not transferring in kind.  I guess that doesn't help much but I guess would just really push back on that position.  If Fidelity is the SDBA provider, they can transfer in kind to Schwab, etc.  That happens literally all the time.

[CuseFan]

Agree with Austin, and would dive into service agreement with RK A to see if their position is supported or they are just being "difficult" because they lost the engagement.  Of course, if all the other SDBAs have already been liquidated and maybe didn't actually have to be, that is another potential can of worms.

Could that SDBA be left behind until resolved, as a couple above have alluded? It's still (or should be) in the name of the plan, would just be outside the RK B system for now. If other SDBAs get re-established with RK B then you have a case for there not being a BRF issue.

[Chris F]

First, Dr. X cannot stop the transition by not giving up his position, which I presume is through a brokerage account feature.  The trustees have authority over the assets, and they presumably take their direction from the investment fiduciaries.  Second, I agree with Austin, his account should transfer easily. I'm not saying you should say who it is, but I'm really curious who RK A. Service agreements seldom get into detail about how the termination of the contract will work, so I'm guessing this function was not addressed in your service contract; however, i would take a look and try to confirm that.

At this point, the investment plan fiduciary is in a serious bind.  There presumably has been a decision that participants will be better off if you transfer to RK B; however, this move isn't occurring.  It can be sort of a cheat on this message board to recommend that legal advice be sought; however, in this instance I think you don't have a choice.  You need a legal opinion regarding what to do. Do you prevent the other participants from getting the value of the move or do you prevent this one participant from getting the value of staying until the investment fund liquidates?  Get the opinion, then follow it.

[applebreeeze]

I dealt with a similar situation earlier this year, perhaps involving the same Russian ETF. The assets could not be transferred to the new recordkeeper via ACAT because they are subject to OFAC blocking sanctions. The fund wasn't available in the new SDBA so they could not be transferred in-kind, and these assets legally cannot be sold or traded so they could not be liquified.

We discovered one participant had holdings in the Russian ETF during conversion, and we simply left those holdings at the prior recordkeeper. All other assets were transferred. We will continue to track and include these assets for 5500 purposes etc. until sanctions are lifted and they can be transferred or liquidated, or the underlying companies in the portfolio file bankruptcy and the holding can be written down to $0.

The only other option we considered was whether the participant could take an in-service withdrawal and roll those assets into an IRA with the prior recordkeeper. The recordkeeper said they could accommodate this, and the participant was interested in doing it. Unfortunately, in our case the participant wasn't eligible for an in-service withdrawal.