You may be familiar with the PBS TV series, Antique Road Show. It’s that show that visits various cities in the U.S., and invites people to bring their unusual antiques and collectibles to be valued by appraisers.
But sometimes, things go awry in these situations as shown in the video below – actually an advert for the BBC version of the show in HD.
Hopefully, 401(k) participants who have hard to value assets in their accounts won’t experience the same type of chaos. But there can be serious issues nonetheless.
Let’s start with a definition. Hard to value assets, a/k/a “HVA” – another one of our many ERISA acronyms) include real estate, nonpublicly traded securities, shares in a limited partnership, and collectibles. They’re usually found in self-directed brokerage accounts (“SDBAs” – sorry, another acronym) which I wrote about earlier this year, Self-Directed Brokerage Accounts: Deja Vu All Over Again?
J.P. Morgan’s recent newsletter analyzed the issues and regulatory activity impacting HVAs in their article, Plan investments – Hard to Value Assets. I’ll leave the critical analysis to the experts like Brian Donohue, FSA, the Managing Director of J.P. Morgan’s Compensation & Benefit Strategies.
But there’s an aspect of HVAs that very timely to some of our clients at this time of year. Form 5500 due at the end of this month for calendar year plans unless extended. HVA can impact “small plans” (those with fewer than 100 participants). These plans are generally exempt from the general requirements under Title I of ERISA that a retirement plan be audited each year by an independent qualified public accountant as part of the plan’s annual report Form 5500.
The exemption is based on the requirement that at least 95% of a small plan’s assets must be “qualifying plan assets” which those assets that can be readily valued. Or in other words, having not more than 5% of HVAs. In such case, the audit waiver can still be met if additional bonding is obtained in accordance with Department of Labor regulations.
And as to who pays the cost of the additional bonding, the Plan Administrator can require that the cost be paid by the participant whose self-directed account caused the threshold to be exceeded. A policy clearly stated in the plan’s Investment Policy Statement. You do have one, don’t you?