Can a non-trusteed plan be placed on a prototype adoption agreement?

[Guest Powers]

We have a client that has a contributory Money Purchase Plan on an Individually Designed Document. We have been retained to review the document and see if most of the provisions will fit on a prototype plan. While doing this I have come across something that I have never seen before. The Individually designed document states that the plan will not be trusteed. The document was signed by the Plan Sponsor who agreed to act as the Administrator of the Plan. Further investigation shows that, true to the document, they have never filled a Schedule P with the 5500 forms. I have never worked with a non-trusteed plan and I am not sure if one can be put on a prototype. It does not appear to be an option on the PPD prototype. Does anyone have any experience with this or have any suggestions as to where I can learn more about non-trusteed plans?

[Guest JimD]

In the past I have worked with plans that were not trusteed but they were funded through contracts with insurance companys and were the prototype or master plans of the insurance company.

[AndyH]

I ran into my first non-trusteed plan fairly recently (a takeover). It was converted from a Trusteed to a non-trusteed. Research made us comfortable that this was ok provided all the money was invested with an insurance company, which it was.

There may have been another situation in which this is permissable, which escapes me at the moment.

I wouldn't think anyone would have developed such a prototpye if not an insurance company, and then I would think it would be proprietary, available only to their investment customers.

[Bill Berke]

I agree with AndyH. I have seen non-trusteed plans, but they have all been fully insured plans on a prototype document, or no document with the insurance contract filling the two simultaneous roles of insurance contract and plan document. FYI: This is very common in the 403(B) area. What bothers me is the "individually design" comment and I don't understand the PPD comment. What is not an option - nontrustee? But, regardless, it should be no problem to switch to a trusteed plan. The trusteeship is not a protected benefit issue so it seems to me that you can change without any problems. If this is a small employer, then why not make the president trustee? He/she is a fiduc anyway.

[Jon Chambers]

Bill, I think that making the president a fiduciary in an additional capacity sounds good but is fraught with potential issues. See the following paper: http://www.advisorsquare.com/advisors/schu...ns/82713136.pdf

I've seen "no trustee" plans with insurance companies that had participant loans, which weren't a fully insured asset, and weren't trusteed. Definitely a qualification issue.

I agree with the comment that moving to a trusteed arrangement is the right call. But unless the plan is tiny, I'd suggest that a corporate trustee makes sense unless cost is prohibitive. There are so many providers that essentially give away trust services, that I can't see why you wouldn't want to engage a professional trustee.

[AndyH]

I have a takeover DB plan with about 300 participants that has all it's assets with a particular (highly rated) insurance company.

The assets were removed from a bank trust company several years ago and placed with this insurance company. At the same time, the plan was amended to remove the trustee (who was the bank) and revoke the trust agreement. This happened before we took it over.

Now, if the client is comfortable with the asset management being with the insurer, why should they change the status and put in a trustee?

Clearly, if they want outside assets, or perhaps participant loans, those are two reasons. Are there any others?

Statute of limitations, perhaps, if a Schedule P isn't filed?

[Jon Chambers]

Andy, I see a few potential issues with your example.

How comfortable are they with their "highly rated" insurance company? Mutual Benefit, Executive Life and General American were all "highly rated" before going into receivership.

Just because they are permitted to not have a trust, that doesn't mean it's prudent to not have a trust.

How is the portfolio managed? Is it prudent and well-diversified with just insurance company assets?

A corporate trustee will be a plan fiduciary, and will likely be named in any potential lawsuit against the plan. Whether or not the suit has merit, the corporate trustee will mount a vigorous legal defense, in many cases, permitting the plan sponsor to "piggyback" on the defense. In many cases, the presence of a corporate trustee with a strong legal staff is enough of a disincentive to cause the potential plaintiff to not file the suit in the first case. It's unclear whether assets with an insurance company would offer the same legal protection.

[Bill Berke]

I agree with Andy (again!!) There is no reason to change if the client is happy (especially at the annual contract review meeting). Although, why anyone would be happy with an annuity is beyond me. And I'm not discussing the risks of plan violations because we know the insurance company will not provide good advice (or any advice). I also think that having one annuity is not a fiduciary issue provided the selection process was kosher, the annuity is "broadly" invested and all the fiduciary operating responsibilities were/are followed.

Jon, my experience (mostly with small plans) is that the costs and hassles that come with a corporate trustee/custodian do not offset the benefit of adding a deep (or deeper) pocket. Unless the bank has disretionary investment powers (in my experience bank investment results are poor), all you are doing is hiring an expensive bureaucracy as a bookkeeper. I surmise that you work mostly with large plans.

[Jon Chambers]

I'm not sure what you define as "large", but most of our clients are $10MM and up, and I would assume that Andy's plan (a 300 life DB plan) is at or near that range. I'd suggest that a plan this size could engage passive trust services for about 10 basis points (0.10%). This is almost certainly less that the implicit cost of the annuity contract, for a higher level of protection. The sponsor could probably engage an RIA AND a trustee for less than the cost of the annuity contract, and be done with investment management responsibilities as well, but that's a different thread.

[Bill Berke]

From my perspective, you are dealing with large plans. Our average client has less than 20 employees and less than $2 million in assets. I said small plans. And everything else you just said is 100% correct. This is a far better case for an RIA managed plan with all the cost savings (and, most likely, much better investment results). FYI we do recommend that our clients consider RIA managers for their investments, we just keep the pres/owner as trustee.

[AndyH]

How would we get a handle on the annuity costs, without striking an adversarial position? It seems to me the costs are hidden.

In my situation, assets are broadly invested with several managers contacted by the insurance company. There is no large expense being reported anywhere. How would the client, or even I, find out what the annuity cost actually is? Clearly it's in the asset performance, but how do you get a handle on it?

[Guest PLHart]

Andy, in order to get a handle on total costs for insurance arrangement, get a copy of group annuity contract and any service agreements executed in connection with plan. The group annuity contract associated with the plan will spell out any asset based charges imposed by the insurance carrier above and beyond the managemnt fees of the funds themselves and the service agreement should spell out any charges represented as administrative expense. You should not have any difficulty finding total fees if you have these documents.

Also, from my experience, the added costs of using an insurance company in the mid-size market place ($10M -$100M)

are favorable when compared to other financial vendors. At this asset size the asset based contract charges can be eliminated and the administrative expenses are competitive. Their are select carriers who provide excellent actuarial and plan design advice (contrary to a comment I heard read earlier in this thread).

I believe most of the negative comments about insurers here are from experiences with small plans where asset based charges can be very high, and the plan sponsor is dealing with a "local" agent who does not specialize in the complexities of qualified plans.

[Guest JPCMPLS]

The options that I have used when delivered a non-trusteed plan is to offer the client our prototype, which requires a trustee to be appointed, or retain the plan as individualized (plan only). If the sponsor wants to retain the group annuity, ownership can be transferred to the trustee named in the prototype adoption agreement. Relius offers volume submitter documents in a non-trusteed format which can be IRS reviewed for the lower prototype user fee ($125)if the client wants to stay non-trusteed.