Schedules H/I and Mutual Funds

[Guest RBJ]

I am a long time lurker who is finally posting a message here. The TPA and the Bank preparing our retirement plan 5500s both state that mutual funds should not be considered a "single issuance" of securities for purposes of completing Schedule H of our 5500 which asks about transactions in excess of 5% of plan assets. See Part IV line 4(j). A similar question arises for small plans for a 20% + concentration of plan assets in a single security. Our auditors disagree, stating that a single mutual fund is a "single issuance" of a security and state that the DOL agrees. The examples in the instructions refer to CDs and bond issuances. It seems to me that the 5500 is getting at diversification issues. Therefore, a concentration in a mutual fund should not trigger a "yes" response (arguably, you might have to "look through" the mutual fund investment to determine whether a combination of plan funds invest in a single stock or bond at a level that exceeds the 5%/20 threshold). In addition, mutual funds are RICs and are not "issued" in the same sense as a corporation's common stock is issued. I have caved on this issue for this year, but am wondering what others think on this point. Are you aware of any published authority on point?

[Guest Stephen Bishop CPA]

The instructions to line 4j of Sch H does make reference to mutual funds (Reg Inv Co)as investments subject to the reportable transaction rules. In my experience as an auditor as well as a reviewer of TPA prepared 5500's we have always reported mutual funds if they fall within the 5% threshold. There is a special rule regarding participant directed accounts, which are virtually always mutual funds. If they are 100% participant directed accounts then the transactions are not taken into account when appling the 5% test. That may be why your bank and TPA take the position that they are not reportable.

[Guest RBJ]

Thanks for the reply, Stephen. I had mistakenly reviewed the instructions to Schedule I, only, and agree with your analysis. How about for Schedule I and the 20% threshold? Would a mutual fund be considered a single issuance for this purpose as well. Unless I'm missing something again, it is here where the instructions are silent.

[Guest Stephen Bishop CPA]

Good question. The instruction to 4i are very vaque, as is common with most of the instructions to the 5500. This question corresponds to question 26i of the old 5500-C. My Practioners Publishing Company deskbook for that old form does indicate that a mutual fund by considered. It also goes on to state that you "not include the underlying investments of the...registered invstment company"