self-managed account supervision

[Guest MAP]

A plan participant has asked a financial institution to open up self-managed investment account related to his qualified profit sharing plan. The participant wants to invest in certificates of deposit with the financial institution. Does the financial institution need special authorization or instruction from the plan trustee in order to open the self-directed account, or is the language in the adoption agreement indicating that plan investments are to be paricipant directed sufficient? Furthermore, how would the self-directed account be titled, i.e. [name of retirment plan] f/b/o [name of plan participant]? Generally, just how involved does the plan trustee/administrator need to be when the participants are allowed to set up their own self-directed investment accounts? Any insight would be greatly appreciated. Thanks.

[Guest PAUL DUGAN]

I believe that the account can be titled in just the name of the trustees but f/b/o would be helpful if more than one self directed account is invoved.

The DOL has stated many times that in self directed accounts the Plan Sponsor and/or the Trustees have a duty to educate the participant. I also believe that the trustees or Plan Sponsor will be liable if the participant is involved in something illegal. Several years a go I had a money purchase plan were a participant withdrew money from a self directed account. The IRS tried to disqualify the plan but settled for a rather large penalty.

[KIP KRAUS]

I would think that unless the plan document and trust agreement allow for outside investments it shouldn't be allowed at all. Just my guess.

[R. Butler]

May not be an issue here, but we often have similar scenarios. An HCE will decide to self-direct, but NHCE's will not be given the same opportunity. That is a definite no-no. If self directed invetstments are permitted, make sure it applies to both HCE's and NHCE's and make sure the investment policy is communicated to all employees.

[Guest RJT]

The self directed account still must be a trustee owned account: the plan participant does not have the right to own the plan asset, though the plan document gives the participant the ability to execute trades. Only the trustee has the authority to bind the trust to the contracts necessary for an sbda. Thus, the trustee signature would be required- though it could even be a broad authorization advising the B/D that it would be bound by individual participants signing up in the trustee sub-accounts.

SDBAs are still subject to the prohibited transaction rules, and I would make sure there is an exemption in place to allow the proposed transaction. The downside, besides the taxes and penalties, is that the transaction can be forced to be unwound if it is a violation of 4975 or ERISA 406.

SDBAs can also be dangerous things, as the decision to open up a plan to self direction is a fiduciary decision subject to the prudence (and monitoring) rules. The fiduciary does not have any 404© protection in the decision to offer an sdba, so care must be taken to document the prudence of such a decision.