SIMPLE IRA Help

[cedeng]

What is the name of your state (only U.S. law)? Ohio

SIMPLE Question with a not-simple answer.

Company SIMPLE IRA uses form 5304, which SHOULD allow us to designate our own custodian.

Company Information Sheet, handed out each year, clearly states: "All investments must be with Fund Company XXX."

This contradicts the spirit of 5304. The problem grows because most folks don't read the IRS form, just the company memo, and year after year, sign their money away.

Company XXX is a high fee and high commission broker. I recently realized for myself that I can work around this disaster. However, many of my younger co-workers - with a lot more to lose - are not going to figure it out. They take the company memo as gospel, and that's that.

Question: Is this a major violation? Is it just a clerical error? Should the boss just switch to 5305 next year? What about the past few years of fees, lost by everyone who believed the memo but didn't read the IRS form?
What about the future fees, if nothing changes? Should I just let sleeping dogs lie?

The problem is moot for me - I transferred all future contributions (trustee to trustee), so I am clear of the fees and whatnot. I am just wondering what, if anything, should be done now...

 

[FlyingRon]

The SIMPLE accounts are set up by the employer. The employer is allowed but NOT required to give the employees a choice. If they are allowed the choice they can fill out 5304 to make that designation. Otherwise they do 5405. They're free to transfer the money after the initial deposit to another IRA elsewhere. It should all be spelled out in the plan documents.

 

[cedeng]

FlyingRon - thanks so much for the info.

I guess I am just missing a fundamental point somewhere...

I understand completely that the employer has a choice to allow or not allow. I also understand that 5304 is for ALLOW and 5305 is for NOT ALLOW.

My problem is that each year I receive a 5304. This certainly implies that I am allowed to pick my own DFI.

My question is: If they hand me the 5304, are they then required to abide by it - and allow me to choose?

 

[FlyingRon]

What FORM they give you is immaterial. They're probably doing it wrong.

What matters is the PLAN DOCUMENTS.

 

[cedeng]

Thanks again, FlyingRon, but there's more to it than that.

In this case, the 5304 "form" IS the company plan. It's not simply a form - it the IRS model plan, and it's the plan that is used here. The "other" document is just a memo, and it is not signed or filled out or anything like that. The 5304, however, IS filled out and signed.

If the custodian has NOT agreed to be the DFI (typical for 5304) - and the custodian must agree to be the DFI before we can use the 5305 - then the custodian is NOT required to transfer my funds "without fee or penalty." That's why I must be free to choose my own custodian.

So either - I can pick my own DFI, which our memo says we cannot do, OR we should be using 5305, and our DFI needs to let me take my money wherever I want AND clear instructions on how to do so must be included in the form (or memo) which they are not.

Our HR person here is stubbornly refusing to help. Who - legally - enforces these things? The IRS? The more I dig, the more confused I get, over something that should be ...well...SIMPLE.

 

[LdiJ]

Thanks again, FlyingRon, but there's more to it than that.

In this case, the 5304 "form" IS the company plan. It's not simply a form - it the IRS model plan, and it's the plan that is used here. The "other" document is just a memo, and it is not signed or filled out or anything like that. The 5304, however, IS filled out and signed.

If the custodian has NOT agreed to be the DFI (typical for 5304) - and the custodian must agree to be the DFI before we can use the 5305 - then the custodian is NOT required to transfer my funds "without fee or penalty." That's why I must be free to choose my own custodian.

So either - I can pick my own DFI, which our memo says we cannot do, OR we should be using 5305, and our DFI needs to let me take my money wherever I want AND clear instructions on how to do so must be included in the form (or memo) which they are not.

Our HR person here is stubbornly refusing to help. Who - legally - enforces these things? The IRS? The more I dig, the more confused I get, over something that should be ...well...SIMPLE.

You do realize that YOU don't have a problem here? You have figured out how to do things they way that you want them done. You could very well irritate your employer if you continue to push on this issue. I think its admirable that you want to help your fellow employees, but there comes a point where its not a practical thing to do.

 

[davew128]

Its been a long time since I dealt with the operations of a SIMPLE but IIRC, yes the employee DOES have the right to choose who the custodian of the money is. Years ago, a former employer set up a new SIMPLE and by default started putting money into a full service brokerage where his client friend would have been the broker. Notwithstanding the fact I was capable of managing my own money, I saw no need to pay full service broker commissions on an account which at the time maxxed out at $6k annually for contributions when I could make my own trades at a discount broker for $9 or nothing for no load funds.

FlyingRon, a SIMPLE IRA doesn't HAVE plan documents. It's an ERISA Plan ONLY for purposes of timely contribution of salary deferrals.

OP, you are in fact 100% correct. Your HR is completely wrong. The employee chooses the institution the money gets sent to. Heck its on page 3 of the Form 5304-SIMPLE. They can't prefill it with their preferred broker of choice and tell you to deal with it. Your employer isn't violating the spirit of the law, they're violating the LETTER of the law. I find it HIGHLY unlikely they would switch to a SEP because funding it would cost them a LOT of money. If they don't want to deal with the administrative burden of cutting checks or making ACH deposits into accounts for multiple custodians, they shouldn't have set up the plan.

LdiJ, whether is an irritant to the employer is immaterial and you know it. If they want to continue operating a SIMPLE IRA for the employees they must comply. End of discussion.

 

[cedeng]

Davew, thanks so much.

NOW what do I do? I must check with the place my funds are being dumped to see what plan was filed with them (5304, 5305, or their own), but mostly to see if they are a DFI in the official sense. If they are NOT, and the also will not let me move the money without a fee (they would not be required to), then I will be forced to approach the uppermost management to tell them they MUST let me put my own FI on the sheet.

If the fund company IS the official DFI (and the boss is using the 5304 by mistake), then I can do as I wish with the money, by transferring it regularly, and all will be well in my world. HOWEVER, all will NOT be well for my co-workers, as previously explained.

Is it possible a law is being broken here? Is it just paperwork? The high-price broker IS friends with management, so it's a bit uncomfortable to say the least. Any advice?