Bank's Control Over 401(k) Funds Results in Prohibited Transaction (Posted January 15, 2002) Technical Tip 28: The following question and answer are from the Department of Labor based on meeting with the American Bar Association Joint Committee on Employee Benefits with in 2000. Assume that a bank acts as custodian for a Section 401(k) plan sponsored by an unrelated corporation. Assume further that the Section 401(k) plan provides for individually directed accounts, but that all uninvested funds will automatically be transferred into a "sweepfund" sponsored by the bank. Assume that the bank has disclosed that the amount of fees it charges for sponsoring the sweep funds will, in many cases, equal the amount of the interest earned on the amounts in the sweep fund. Is this a prohibited transaction? PROPOSED/SUGGESTED ANSWER: Assuming that the bank has full discretion regarding what amounts are placed in the sweep fund (as opposed to being immediately invested in another investment vehicle), that is a prohibited transaction, because the bank can use its discretion to increase its income (by allocating more amounts to the sweep fund). DEPARTMENT OF LABOR ANSWER: The staff agrees with the proposed/suggested answer. The bank has discretion over which monies are swept in and how long those monies stay in the sweep fund (even if the sweep is automatic). Accordingly, the bank exercises discretion which can affect its own compensation, and there is a prohibited transaction. On the other hand, if the bank does not have that discretion, there would not be a prohibited transaction in the circumstances presented. The Department issued a letter to this effect to the Comptroller of the Currency (the so-called "Plotkin letter.") View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.