F-1 Q: What are some typical investments that make up 401(k) plans?

A: Typical investment alternatives include money market funds, guaranteed investment contracts (GICs), bank investment contracts (BICs), debt securities, stock and bond funds, and employer stock. The TRA '97 imposed a limit on the amount of employer securities and real property that 401(k) plans may require participants to invest in with respect to their own contributions.

F-2 Q: What kinds of companies offer investment management services for 401(k) plans? -TOP

A: Banks offer a variety of 401(k) plan investment options to sponsors of 401(k) plans, usually through their trust departments. Insurance companies typically offer group annuity contracts that pay fixed streams of income, as well as variable return (equity-based) investment products. Mutual funds and investment advisory firms that offer mutual funds provide a wide range of investment opportunities. Broker/dealers offer both individual portfolio management services and pooled investment arrangements to sponsors of 401(k) plans.

F-3 Q: What are the basic guidelines for NASD Registered Reps and SEC Registered Investment Advisors Use of Our Products? -TOP

A:
1) NASD Registered Rep sets up an Advisors 401(k), and gets 100% of all commissions and trailers IF the client selects LOAD mutual funds offered with Advisors 401(k). RIAs cannot collect mutual fund commissions, by law.
2) NASD Broker sets up an Advisors 401(k) and has convinced the client to open separate participant brokerage accounts with his employer's brokerage firm (i.e.Merrill Lynch, Dean Witter, etc). As the Registered Rep responsible for all the separate brokerage accounts at his firm he is going to collect a pre-set "asset fee", charged to each account typically on a quarterly basis, by his employer firm. This asset fee will be essentially his commission, and he will not collect commissions directly from the mutual funds the client uses.
3) RIA sets up an Easy 401(k) and is the Registered Investment Advisor of record. RIA recommends to his client only no-load mutual funds, and gets ZERO commissions from these funds. He invoices his client DIRECTLY for his services, and we have no involvement in this transaction.
4) RIA sets up an Easy 401(k) and is the Registered Investment Advisor of record. He persuades his client to select individual participant discount brokerage accounts (i.e. Schwab, E-Trade, Waterhouse, etc.) as the main investment vehicle for the plan. RIA has a special relationship with the discount brokerage, which allows him to collect an "asset fee" on the business he brings to the brokerage. The brokerage will, on a quarterly basis, deduct a pre-determined "asset fee" form each individual participant account, and forward this asset fee to the RIA as his compensation. We have NOTHING to do with this arrangement beyond directing the advisor to set-up with his client this capability on the discount brokerage he intends to use for his client's 401(k).

F-4 Q: Under what circumstances, according to the DOL, can a service provider receive fees from mutual funds without violating ERISAs self-dealing and anti-cutback provisions? -TOP

A:In two advisory opinions [DOL Adv Ops 97-15A, 97-16A], the DOL generally took the position that as long as a service provider does not exercise any authority or control to "cause" a plan to invest in a mutual fund, it will not violate the self-dealing and anti-kickback prohibitions under ERISA Sections 406(b)(1) and 406(b)(3), respectively, by receiving fees from mutual funds in connection with plan investments. A trustee that advises plan fiduciaries regarding mutual funds in which to invest plan assets would have such authority or control. A directed trustee would be considered to have the requisite discretionary authority or control if it assists plans in selecting mutual funds to be plan investment options or reserves unrestricted authority to add, delete, and substitute funds on the mutual fund menu for a bundled program, or both. When a service provider is a fiduciary and causes the plan to invest in mutual funds that pay fees, the service provider must disclose any fee arrangements and offset any fees received, on a dollar-for-dollar basis, against other fees the plan is obligated to pay to avoid violating ERISA's self-dealing and anti-kickback provisions. 
A nonfiduciary service provider that provides nondiscretionary Administration and recordkeeping services would not be prohibited from receiving fees solely as a result of deleting or substituting a fund from a bundled program, provided that the appropriate plan fiduciary makes the decision to accept or reject the change. In that regard, the fiduciary must be provided advance notice of the change, including any changes in the fees received, and afforded a reasonable period to decide whether to accept or reject the change and, in the event of a rejection, secure a new service provider. The fees need not be offset.

F-5 Q: What should a 401(k) plan investment policy cover? -TOP

A:Investment policies need to be flexible enough to adapt to an employer's specific situation and reflect the fiduciaries' attitudes and philosophies. For a typical 401(k) plan that allows participants a choice among investment funds, the policy should also recognize the participants' needs and goals. Further, the policy should deal with the number and types of funds to be made available. How many choices are enough? How many choices are too many? 

The policy should also cover how any loan program will affect investments and whether the withdrawal program is consistent with the types of funds selected. For example, if participants are expected to access funds through loans or withdrawals, do the investment funds allow for such withdrawals without penalty? 

Finally, the policy should deal with the regulatory issues, specifically the requirements of ERISA Section 404(c).

F-6 Q: Does self-directed brokerage accounts comply with Section 404(c) with respect to instructing plan fiduciary? -TOP

A: Yes. One potential issue under Section 404(c) is whether a self-directed brokerage account complies with a condition that requires participants to have the opportunity to give investment instructions to an identified plan fiduciary. In a typical self-directed brokerage account, participants give investment instructions directly to the broker, who rarely assumes the role of a fiduciary. Nevertheless, it should be satisfactory for participants to give instructions directly to the broker, since the broker should be treated as having received those instructions as an agent of the plan fiduciary

F-7 Q: Should employer restrict certain investment in self-directed accounts? -TOP

A: Yes, if able to, but the very nature of self-directed accounts makes this almost impossible until discount brokers add the capability in the future. Plan sponsors may choose to prohibit participants from purchasing employer securities in their accounts. Because of issues arising under federal securities laws, plan sponsors generally are obligated to monitor trading of company stock by employees, which can be an administrative burden. Also, employers can avoid the risk that participants might enter into a so called ERISA-prohibited transaction in the event that an employer security fails to satisfy ERISA's definition of a "qualifying employer security."

Second, plan sponsors should consider restricting investments in limited partnerships, which can raise two difficult issues for the plan sponsor. The plan must value all its assets annually for 5500 reporting, and it may be difficult in some cases to obtain a reliable valuation for a partnership, particularly if the partnership is not publicly traded. Plus, many partnerships can generate unrelated-business taxable income, which could require the plan to make annual tax filings and develop procedures to collect tax payments from the self-directed brokerage accounts.

F-8 Q: What is an Investment Policy, and do our clients have one? -TOP

A: The Investment Policy is a written document that describes the steps and procedures plan trustee will deploy to select and review suitable investments for inclusion in the company's pension plans. A generic Investment Policy is included in the 401(k) Pro, Inc. Plan Adoption Agreement.

F-9 Q: What is the difference between a NASD-Registered Representative and an SEC-Registered Investment Advisor? -TOP

A: The NASD Registered Representative goes through a much more rigorous testing an licensing procedure, and is legally allowed to sell investment products (stocks, bonds, mutual funds, partnerships, etc.) to the public for a commission.
SEC-Registered Advisors are not allowed to collect commissions, and instead charge their clients a fee (either a percentage of the money they manage or a fixed dollar amount) in exchange for their advice. They are not allowed sell investments to the public, but only advise.

F-10 Q: How does a NASD-Registered Representative use Advisor 401(k)? -TOP

A: The NASD-Registered Representative (RR) uses Advisors 401(k) as follows:
1) The RR sets up an Advisors 401(k), and as the broker of record, and gets 100% of all commissions and trailers IF the client selects the mutual funds we offer with Advisors 401(k)
2) The RR sets up an Advisors 401(k) and is the broker of record, but he has convinced the client to open separate brokerage accounts with HIS FIRM (i.e. Merrill Lynch, Dean Witter, etc). As the broker of separate brokerage accounts he is going to collect an asset fee, charged to each account by his brokerage company, and that will be his "commission".

F-11 Q: How does a SEC-Registered Investment Advisor use 401(k) Easy? -TOP

A: The SEC-Registered Investment Advisor (RIA) uses 401(k) Easy as follows:
1) The RIA sets up an Easy 401(k) and is the broker (or advisor) of record. He uses no-load funds, and gets ZERO commissions, but he bills his client separately for his "services."
2). The RIA sets up an Easy 401(k), and is the broker (or advisor) of record. He has his client select a discount broker like Charles Schwab for all the individual accounts. He independently and without our involvement has Schwab (or whomever) set him up as an advisor to each of the individual accounts, and Schwab (or whomever) will automatically deduct a "fee" from each account on a quarterly basis, and pay the fee directly to him. We have NOTHING to do with this arrangement beyond directing the advisor to set-up with his client this capability on the Schwab accounts we set-up.

F-12 Q: Does ERISA require Employers to provide investment information and eductation to plan participants? -TOP

A: No. The Department of Labor has explained that relief from fiduciary liability under ERISA Section 404(c) is conditioned on, among other things, plan participants "being provided or having the opportunity to obtain sufficient investment information regarding the investment alternatives available under the plan in order to make informed investment decisions." The DOL has also stressed that compliance with this condition, however, does not require that participants and beneficiaries be offered or provided either investment advice or investment education regarding general investment principles and strategies, to assist them in making investment decisions. This point is stated expressly in the regulation itself: "[A] fiduciary has no obligation under part 4 of Title I of the Act to provide investment advice to a participant or beneficiary under an ERISA Section 404(c) plan. In sum, there simply is no fiduciary obligation to provide participants, even those using self-directed accounts, with investment advice or investment education.

F-13 Q: What is a GIC? -TOP

A: Guaranteed investment contracts (GICs) are issued by insurance companies. They pay a rate of interest that is fixed for the life of the contract or for a specified period of time.

F-14 Q: What is a BIC? -TOP

A: Bank investment contracts (BICs) are essentially the same as GICs except that they are issued by banks instead of insurance companies.

F-15 Q: Can a bank or other investment provider offer certificates of deposit (CDs) in a 401(k) plan? -TOP

A: No. The bank's money market fund is okay, but all 401(k) investment must be able to be broken down to single dollars, and CD's cannot be broken down to single dollar units ($1).

F-16 Q: If a bank has part ownership of a brokerage company or a family connection to a brokerage company, can they offer that brokerage as the only investment option in a 401(k)? Can they offer it as one of two investment options? -TOP

A: This is probably not a good idea. This arrangement might benefit the employer, and possibly other parties in interest, which would be a violation of the "exclusive benefit rule" and a prohibited transaction. Upon audit this would certainly receive scrutiny.