Current Availability of Benefits

[Guest Thornton]

A 401(k) plan permits all participants to segregate and direct their account balances. This option is currently available at a reasonable cost, and all participants do direct whereever and however they want to. A HCE wants to hire a professional money manager to invest his account balance. The minimum investment is $100,000. The plan sponsor has been told that to allow this would violate the current availability provisions of Treas. Reg. sec. 1.401(a)(4)-4(B)(1).

I disagree since the right to direct is available to all participants and there is no required minimum balance for self direction, but cannot find a supporting citation. Can anyone help?

[MGB]

If a particular mutual fund required a 100,000 minimum purchase, would it be off limits to the person just because no one else had 100,000 in their account? I don't think so. I don't see any difference in the analysis of using a professional investment manager. It shouldn't be a restriction.

[Tom Poje]

I believe the broker is correct. When testing current availability, there is no testing exception for minimum dollar requirements (loans and the minimum 5000 cash out are exceptions)

[Guest Thornton]

Tom, I agree that there is no testing exception for minimum dollar requirement. However, the benefit of self direction is currently available to all participants on a nondiscriminatory basis. A participant can self-direct anywhere he or she wishes. A particpant with less than $100,000 is certainly free to hire a manager with a smaller minimum than $100,000. Also, the investment manager, not the plan sponsor, is setting the minimum here.

[mbozek]

The BRF regs only require that the plan permit each participant to have the right to direct investments under the plan. Hiring an investment mgr is another way of self directing investments and is specifically permittted under the 404© regs. The fact that a particular mgr has a $100k minimum does not make use of the mgr by an HCE discriminatory because all ee can still elect to self direct accts under the plan. An individual with less that $100k could hire an investment mgr who will manage less than 100k. As long as the 100k minimum is a requirement of the mgr not a requirement of the plan it should not be a problem under the BRF regs.

[Tom Poje]

I'm still not sure.

The ERISA Outline Book uses the following illustration (9.129, 2001 edition)

"...suppose a plan provides a menu of eight investment options. ..the eighth option is a separate brokerage account. The brokerage account option requires $50,000 minimum accounty balance, whereas all account balances may be invested in any of the other seven options. The brokerage account option option is a separate right or feature that must be tested for availability because it is available to a different group of participants than the other seven investment options. When testing availability, participants whose account balances are currently less than $50,000 are treated as NOT having this right or feature available to them."

[MGB]

This example is a restriction within the plan limiting the participant's rights. The 100,000 minimum for the specific investment advisor is not a plan provision, nor does it limit anyone in their right to use any plan provision. This example does not apply to the situation given.

[Guest Thornton]

Tom,

I've read this. The example places a minimum account balance of $50,000 for a separate brokerage account. I agree with Sal's conclusion in the example. However, in my case, there is no mimimum required to self direct into a separate brokerage account, it is available on a nondiscriminatory basis to all participants. Read on to the next paragraph. The IRS indicated that a minimum asset requirement for a managed account "would not necessarily be a problem under Section 401(a)(4)." Factors to be considered are:

1) The fees charged by the mutual fund for investment management services to other investment accounts.

2) Whether a reasonable alternative could be made available to smaller balances.

3) Whether the minimum account requirement is set by the mutual fund or by the employer.

Thanks for your feedback on this question. In the year of restatements, it's a refreshing change of pace!

[mbozek]

There is a clear distinction between a plan provision which cannot be applied on a discriminatory basis and a provision set by an outside money manager for managing accounts, which can include having a minimum net worth as well as minimum amt to invest. The former is not permitted the latter is permissible.

[R. Butler]

I agree with Tom Poje, particularly if the fee charged by the money manager is significant enough that it effectively prevents participants with balances under 100,000 from attaining the service. The fact the minimum balance requirement isn't stated in in the plan isn't conclusive, it is merely a factor to be considered. Two other factors, as Thorton specifies, are the cost for services and whether reasonable alternatives are available.

[Tom Poje]

Actually, I would say I don't know for sure. Is it effectively available as well?

I remember reading about match contributions, something like 100% of the first 6% then 50% on the next 6%.

Currently available to all, but only the HCEs could afford to defer more than 6%, so effectively, no it wasn't really available. Could you prove something like that? probably not.

If you go back to the illustration, if the plan set up the investments and set the limit ay 50,000, the conclusion is that it is wrong.

And lets further pretend there is only one great kahoona with a balance of over 100,000. He simply says, ok, instead of setting the number of investments and which investments, you can do whatever you want. That is a good work around the problem, and it looks like, as Thorton indicated, if reasonable fees are charged, etc, will work.

If the plan had 100 people and each had their own investments I had to track I am not sure I would want to process it, but that is me. I am too lazy.

[mbozek]

It all comes down to how an adivisor views the $100,000 limit for for opening an account as either a plan provision or a limit set by the investment mgr. I have no problem in defending the 100k limit as permissible because it is not a plan provision, and it is an industry standard for certain types of fees, e.g., wrap accounts which are set by investment firms that manage money. If a firm cannot set a minimum amt that it will mange for self directed accounts then it cannot set other restrictions such as a minimum net worth requirement that are permitted under the securities laws.