In our May 30, 2012 post, we spoke about whether a “true” company 401K plan (to the layman, a 401K plan at a company with employees, etc.) can self-direct their retirement assets. The answer is YES.
While permissible, are there reasons why a company may not want to establish a self-directed 401k plan? I mean I rave about the benefits of a self-directed 401K all the time….wouldn’t I do the same with a “company” 401K plan as well? Wouldn’t I be a proponent for all of the employees of a company having the ability to self-direct and take control of their 401K accounts?
Well, yes AND no.
You see, when a company establishes any 401K plan, there is a Trustee identified for the plan. This, in many cases, may be the owner of the company. The Trustee has the responsibilities for carrying out all fiduciary responsibilities of the plan. This is a very important responsibility which a Trustee must take seriously. To show you how seriously, just review the various lawsuits that employees have brought against employer-sponsored 401K plans claiming lack of diversity within the account which allegedly lead, ultimately, to the participant accounts losing value. Some could say this is sour grapes on behalf of the employee or employees, but it drives home hard the point that the Trustee of the plan has certain fiduciary responsibilities for the plan. NOW, can a business owner assign the Trustee responsibilities to another individual (e.g., CPA, attorney) outside the plan….of course. But, the point cannot be missed that an employer, Trustee or not, has responsibilities or perceived responsibilities to the plan.
In contrast, this is NOT a concern to the self-employed person (with no employees) as they are identifying themselves as Trustee of the plan. If the plan loses money, it is not like the Participant (self-employed individual) is going to sue the Trustee….as they are the same person. Therefore, as long as the individual wishes to, there is a huge, positive upside to self-directing your retirement assets as you can invest in traditional (e.g., stocks, bonds, mutual funds) and non-traditional (e.g., real estate) assets, all from one account.
So, why would a business owner want a self-directed 401K plan for the owner and the employees?
Simple enough…to provide investment options and true diversification to both the owner and employees to their retirement plan. The negative: the business owner may not want the real or perceived responsibility of serving as the Trustee of the plan. In cases where an employee invests their funds into an asset that loses some or all of its worth, the employee may come back and sue the Trustee (e.g., owner) of the plan for “allowing” them to even have the ability to participate in self-directed aspects of the plan. Further, while not supported by IRS Code, the employee could sue, saying they did not have appropriate guidance and education related to the selection of their investment.
But if you read my recent post, you may correctly say that the IRS has stated that a Trustee is not responsible for a self-directed Participant account….and, you would be correct. However, in today’s world, that does not stop lawsuits from occurring.
Are self-directed plans for “company” 401K plans still an attractive option to a business owner….absolutely, and without question. First, the concerns raised with serving as a Trustee of the plan are simply that…concerns that a business owner should at least consider. Second, even if the Trustee (business owner) did not want to assume the responsibilities as the fiduciary of the plan, this responsibility could be shifted in part or all to another Trustee. Bottom line: a business owner may find that the benefits of having a self-directed 401K plan will not only benefit the employees of the company but the business owner as well. In theory, it should place responsibility on the person that should assume more responsibility for the performance of the retirement plan….the employee.