HOW WILL WE BE AFFECTED?

September 21, 2008

How will we be affected?

By Jenifer B. McKim Globe Staff

Melissa Hamlet worries that the stock market's wild swings will mean fewer potential buyers for her home. Restaurant owner Christopher Tocchio fumes that the government isn't holding failing businesses accountable for their reckless decisions. And Mary Vaughan, a recent widow, wonders why government rescues corporate America while she struggles to pay her bills.
"I'm paying enough taxes now, and the taxpayers have to bail these big guys out?" she said.
Anger, fear, and shock about the Wall Street meltdown are percolating through conversations along Massachusetts' main streets. A whirlwind week of unprecedented government intervention to prop up the nation's financial system seemed to confirm people's worst fears:

The economy is in peril and recovery is far off.

Seemingly overnight, nearly everyone felt poorer - homes lost value, 401(k) investments were battered, and jobs, for some, were in jeopardy.

Nan Sabel, 56, a Bedford certified financial planner, said that as stock indexes dipped and surged last week, her office was flooded with calls from clients wondering what to do. Even money market mutual funds, which are among the safest places to park cash, spooked investors when some funds reported losses - and the government responded with a costly plan to insure such fund deposits.

"I have had people come out of the woodwork," said Sabel, a principal of the Women's Financial Network. "People have called me about their money market. They want to review their whole portfolio. I'm hearing a lot of nervousness in their voice, people calling and saying, `Am I OK?' I haven't heard that in years."

Hamlet, 36, and her husband, Jason, 33, have been trying to sell their Whitman house for two months. Until they do, their dreams of a larger home are on hold. They recently lowered the price to $329,900 from $339,000 and held an open house - neither tactic sparked interest. Last week's barrage of bad financial news only heightened their stress.

"The feedback we are getting from buyers is not that the house is overpriced, but that there are a lot of bank-owned homes in Whitman," Hamlet said.

Tocchio, who owns the restaurant Church in Boston's Fenway section, is afraid people will stop dining out because of the financial uncertainty.

"Everyone is in a panic," he said. "Froma personal standpoint, my sales are going to suffer and I've already seen it."

The father of two said he understands why the government stepped in to save mortgage giants Fannie Mae and Freddie Mac, but he's growing increasingly frustrated by government bailouts, which now include a proposed $700 billion to buy up bad mortgage-related assets.

"From a taxpayer standpoint, why is it my responsibility to bail these companies out? It's wrong," said Tocchio, 38. "The CEOs of the companies should be held accountable."

Vaughan, a 57-year-old widow, wonders why massive companies get help while people like her are left to fend for themselves. Her money problems started when her husband became ill a few years ago. They refinanced their home three times, but her husband's $1,000-a-month Social Security check was not enough to keep up with payments. Now she is on the brink of foreclosure.
"Nobody helps us out and we have to bail out these guys that have lived a good life for years," Vaughan said. "I'm even up to my eyeballs in credit card debt."

The economy is affecting 31-year-old Benay Ames of Braintree in a different way. She said she has a secure job in healthcare, and her husband, a stone mason, is working, too.

But he just lost his bid for membership in the Bricklayers and Masons Union - it can't find work for new members because of the weakened job market, Ames said.

"What angers me is the people responsible for this are making half a million a year, and it's not going to hurt them," she said. "Yet as a taxpayer in the middle class I'm going to be the one who pays for it."

With so much changing on the economic front last week, many decided the best strategy was to do nothing. For instance, Jessica Walsh, 30, said she and her husband, Matthew Judd, 32, have opted to stay put in Hopkinton rather than risk a move that would require them to change jobs.
If others adopt a similar outlook toward home-selling, it could hurt Walsh's income - she's a real estate agent.

"Right now it is not the time to move your life and change anything big," she said. "My priorities have switched. Because of everything that is going on, the stability in the job is the most important thing."

Retiree Jack Osgood, 83, also isn't planning any major life changes.

He said he has lived through far worse economic times - the Great Depression. And while the world was a much different place then, Osgood said, greed remains a powerful force.

Like other investors, the Roxbury resident has recently lost money in his mutual funds and on his shares of investment bank Morgan Stanley, whose stock has been under pressure.

Still, he said, the retirement income he earns from investments in the "low six figures" is plenty, and he is confident his funds will eventually recover. But perhaps not soon enough.

"I just may not live long enough to reap that," he said.

By the end of the week, most people far from the center of the financial maelstrom were left with many more questions than answers, and mounting concerns about what happens next.

"It's so secretive, so you're not sure why all this happened," said Rachel Weinstein, a homemaker in Waltham. "The sky's falling. We saved it. But why did the sky fall?"
Kimberly Blanton of the Globe staff contributed to this report.


© 2008 Boston Globe. Displayed by permission. All rights reserved.

RELIEF FOR PRINCE WILLIAM COUNTY RESIDENTS

As phones ring in the background and a busy receptionist fields calls that seems to be ringing every phone in the office.
This Prince William County couple finds time out of their busy day to share their story with me. It's a story of struggle and uncertainty, a story of loss, but most importantly renewal.

Eugene and Gigi Smith began investing in real estate in the fall of 2003 right after their wedding. They; like so many other green investors; began exploring the many loan options available to them. Property values were on the rise and people were making money hand over fist. Everyone they knew was investing in real estate. The couple decided that they were prepared to get in as deep as it took, to secure their share of the fortune all around them.

No sooner than they began their research Eugene was called to war for Operation Iraqi Freedom. This put their plans on hold for a couple of years, but the couple returned to the area with a new found since of urgency. Immediately they purchased a house for themselves and their first born baby girl Madison. The story is all too familiar, even down to the most popular baby name of 2005. Sound familiar, a couple purchases more houses than they could afford, and in the end stares foreclosure right in the face.

What happened to all the equity? Where did the market go? So many other homeowners are in a state of shock asking themselves these very same questions. Eugene and Gigi were both licensed real estate agents, and Eugene was even a seasoned loan consultant. He was instrumental in opening Virginia’s only schools for residential real estate finance. "I knew it was coming it was just a matter of when.” Explains Eugene. He tells me stories of loan officers who made their money by charging Spanish-speaking clients eight points or sometimes more.

He also revealed to me that there are some good lenders left as well. Lenders like his mentor Greg Kuhndiger, who gave him his start in the mortgage business. "Greg made it a point to never let anyone at HomeFirst Mortgage get away with charging more that three points. He just felt it was gouging, and he was right." Also he favored Tuan Tran, owner of the Falls Church juggernaut Dream Mortgage. "I loved watching Tuan work for people.....there is no person I know in any business that holds themselves more responsible to their client than Tuan."

It would seem that they were learning the business from the right people, so why the breakdown? Well the Smith's seem to think they were blessed to be able to narrowly escape foreclosure multiple times. With a growing family this type of loss could have been crippling. With the birth of their third child, and Gigi's unexpected health problems much stability was needed. So they left the real estate industry altogether.

The problem is that the draw of the market is still there for them. It may appear to friends and family that they have barely gotten out alive, but for them the knowledge gained along the way was priceless. As a matter of fact it's making the idea of punching a clock unbearable to Mr. Smith.

Eugene is struggling to stay committed to his "day job", because his passion still lies in real estate. So together, Eugene a property manager and real estate marketer, and his wife Gigi a Realtor and asset manager have begun a property management and consulting firm. The firm is called The Presidents Club, LLC.

The Presidents Club, LLC is a residential real estate management and consultation firm, dedicated to helping Prince William and Stafford county homeowners avoid potential disasters. Also they work closely with investigative sources to find the “right” renters or buyers for residential properties. The couple is joined by yet another mentor, longtime investor James Best.

Mr. Best is known for his down-home appeal to people, and his uncanny ability to think outside of the box. James Best, (Also a Prince William County resident) is a licensed real estate agent and CEO of Genesis Investment Group LLC which acquires and manages real estate properties.

Mr. Best is assisted by his wife, Mrs. Judy Best. She too is a military veteran with over 25 years of leadership and management experience. Together they have amassed a wealth of knowledge and experience in financing, purchasing, marketing, selling, leasing, and managing real estate.

Genesis would like to bring an educational component into the housing aspect by teaming up with local agencies, Social Services and local businesses. Mr. Best explains, “Genesis will provide on-site training for all tenants. Tenants who are educated and trained are less likely to default with mortgage programs. Unlike many other realty companies that are solely concerned with profits our primary objective at Genesis is to turn today’s renters into tomorrow buyers.”

Together with Keller-Williams real estate brokerage; Gigi, James and Eugene are poised to protect, strengthen and rebuild families through education. When asked how they planned on getting people out of the mess they're in, they all answered, "One at a time."

So what’s their next move? Well the team has been meeting with a P.W. County Non-Profit housing association and a P.W. County Class (A) Licensed home builder. The goal in mind is to turn ordinary neighborhoods here into organized investment groups. These investment groups could then buy up the abandoned and foreclosed homes in their areas before they get vandalized or boarded up. “These homes could be renovated, and rented or sold for the betterment of everyone in our community. Why should our community wait for the banks to do it, it was those same banks that helped us into this mess in the first place.” Mrs. Smith explains.

This approach would bolster property values within certain zip codes that desperately need it. For many their homes were an investment for retirement, and with sales prices in a huge slump the equity is all gone.

“Our win-win approach teaches people how to invest in leveraged property through their retirement accounts. This allows for community investor to skip out on bank loans and credit inquiries. For instance, if your IRA has $40,000 in cash and you're interested in investing in a property selling for $200,000, the IRA can assume the $160,000 mortgage to complete the purchase.

All earnings can still be rolled into a “like property” (investment property) tax-deferred with an IRS 1031 exchange filing at the time of sale.

“These techniques are common in advanced real estate investment deals, now we are just going to teach our community, and give our neighbors the tools to rebuild our county.” Mr. Eugene Smith

LIFE IN THE DISTRICT

Posted by mariko on September 7, 2008 – 9:28 am


Life in the District





DCLife Magazine is a network for all those who live in the Capital of the US of A, Washington D.C. Come here to check out all the sights, sounds, smells and flavours of Chocolate City.




Network Creator, DCLIFEMagazine.com, keeps members engaged with forum discussions about the DC real estate market or the enhancement of life through having children.




Members show off their lives in and around Washington through blog posts. Check out the latest headlines that are keeping members entertained! Read up on How Travelers Can Change The World or learn when the next movie screening will be.




If you are one of the many people living in and around Washington, take a look at DCLIFEMagazine and see life from the inside!








Posted by mariko, written on September 7, 2008 – 9:28 am.It is filed under Network Spotlight (Permalink)

Self-directed Investment Options in 401(k) Plans: Legal and Fiduciary Issues

Self-directed Investment Options in 401(k) Plans: Legal and Fiduciary Issues

By Pillsbury Winthrop Shaw Pittman LLP



What is a Self-Directed Option?


As an extension of the continuing trend toward expanded participant investment options in 401(k) and other defined contribution retirement plans, investment providers are marketing an option that provides participants access to brokerage accounts, from which they may elect to invest in a broad array of investment vehicles. These arrangements are generally referred to as brokerage windows or self-directed options ("SDOs").
If an SDO is adopted, a plan participant is allowed to transfer money from the plan's regular menu of investment funds to a brokerage's money market account. From that money market account, the participant then may choose to invest in any of the investment options available under the particular brokerage arrangement agreed upon between the plan's sponsor and the investment company (or companies). As a rule, investment fees in the SDO are the same as those charged for an individual retail investor-in other words, the fees are most often higher than the fees negotiated by the plan sponsor for the regular menu of funds.


What types of investments may be made available through an SDO?


Some of those marketing SDOs and some employees lobbying for them suggest that there should or need not be any particular restrictions on the types of investments that would be available by way of an SDO. This is incorrect as a policy and legal matter.
For the employee who says "this is my money and I should be able to invest it however I want," the response is that there are important distinctions between money in an employer-sponsored retirement plan-including the money contributed by the employee-and personal investments made with take-home pay.
If not for special tax rules enacted by Congress for employer plans, the value of an employee's plan account would be taxable to the employee as soon as it vested. Instead, if an employer plan satisfies the requirements of the Income Tax Code and ERISA, income tax is deferred on the contributions (except for employee after-tax contributions) and earnings until the payout date. These special tax benefits are provided by law to encourage employer-sponsored retirement plans. But in exchange for these tax benefits, plans must be designed to serve the public policies of ERISA. In particular, the primary public policy of ERISA is to ensure that employees have adequate retirement savings. Not surprisingly, then, an ERISA plan must be designed to minimize the risks of large investment losses. The employee has a choice, then: invest within a restricted universe using tax-deferred funds or invest within an unrestricted universe using after-tax dollars and paying tax on earnings currently.

Specific legal prohibitions and fiduciary rules impose a number of restrictions on the types of investments that may be offered through an SDO. These rules are discussed below in detail.


Background on ERISA section 404(c)

Most employer 401(k) plans and other defined contribution individual account plans are intended to be ERISA section 404(c) plans. Under section 404(c) of ERISA, if a plan provides for individual accounts and permits a participant to exercise control of the assets in his or her account, then the plan's fiduciaries may not be not liable "for any loss, or by reason of any breach, which results from such participant's, or beneficiary's exercise of control." To satisfy section 404(c), a plan must comply with detailed regulations about the characteristics of at least three "core" investment alternatives that must be offered and about investment rights and information that must be provided.
Many articles have been written about section 404(c) and I do not propose to go into detail on that subject in this article. Instead, I will assume that the plan for which an SDO is being considered does, in fact, comply with section 404(c). However, it is important to keep in mind that it is the Department of Labor's position that compliance is determined on a case-by-case basis and that any person claiming relief from liability under section 404(c) "will have the burden of proving that the conditions of section 404(c) and any regulation thereunder have been met."1

Potential liabilities associated with an unrestricted SDO
Although ERISA section 404(c) is itself worded broadly, the legislative history and regulations make it clear that the plan fiduciaries of a section 404(c) plan still retain significant fiduciary and other duties and liabilities 2 that restrict the range of investments that should be permitted under an SDO. In addition, certain Internal Revenue Code rules and other legal rules and practical considerations make restrictions advisable. These liabilities, duties and advisable restrictions are generally described in greater detail in this article, but they are first summarized below:
To avoid a breach of fiduciary duty by the plan sponsor, no investment should be permitted that would cause the plan to hold assets with "indicia of ownership" outside the jurisdiction of the federal district courts of the United States;
To avoid a breach of fiduciary duty by the plan sponsor, no investment should be permitted that is not permitted by the plan document or that would jeopardize the plan's tax qualified status;
To avoid a breach of fiduciary duty by the plan sponsor, no investment transaction should be permitted that could result in the loss of an amount greater than a participant's account balance;
To avoid breaches of fiduciary duty by the plan sponsor and other persons related to the plan, and the imposition of excise taxes on these persons, no investment should be permitted that would result in a "prohibited transaction" or that would greatly increase the difficulty of compliance with the "prohibited transaction" rules;
To avoid potential problems with distributions and IRA rollovers, no investment should be permitted if it is illiquid or not permitted for IRAs; and
The plan sponsor may want to prohibit investments that would generate unrelated business taxable income ("UBTI") for the plan.

Prudence in fund selection and retention

Compliance with section 404(c) only shields the plan fiduciaries from any loss or any breach that results from the plan participant's exercise of control over the assets in his or her account. The regulations point out that it is necessary to determine, in any particular case, whether a loss or breach actually resulted from a participant's investment decision, and state that relief for fiduciaries is available only if the loss or breach is the "direct and necessary" result of the participant's exercise of control.
In the Preamble to the section 404(c) regulations, the Department of Labor "points out that the act of limiting or designating investment options which are intended to constitute all or part of the investment universe of an ERISA 404(c) plan is a fiduciary function which, whether achieved through fiduciary designation or express plan language, is not a direct or necessary result of any participant direction of such plan." Therefore, "the plan fiduciary has a fiduciary obligation to prudently select such vehicles, as well as a residual fiduciary obligation to periodically evaluate the performance of such vehicles to determine, based on that evaluation, whether the vehicles should continue to be available as participant investment options."

While the Preamble language makes it clear that any choices the plan sponsor makes in designating investment options must be prudent (and the retention of those choices must also be prudent), it leaves unclear whether the prudent fund selection/retention duties are inapplicable if the plan sponsor places no limits on the investment universe of a section 404(c) plan. To date, no regulations or rulings address this point. It seems highly unlikely, however, that a plan sponsor could duck one of the most fundamental fiduciary duties in ERISA-the duty of prudent investment-by the simple expedient of making the inherently imprudent decision to place no restrictions whatever on the investment vehicles a participant may choose. In any event, as is explained further in this article, there is no doubt that the plan sponsor will want to place some restrictions on investment vehicles offered through an SDO. That being the case, the Preamble compels the conclusion that the fiduciary duties of prudent selection and retention of investment vehicles will apply to the SDO.

This conclusion immediately leads to the question: how is it is possible to fulfill this fiduciary duty if a very large universe of investments is offered through an SDO? This question also has yet to be answered in any regulations or rulings. A good argument can be made that the fiduciary duty applies to the selection of the SDO, not to the individual investments available through the SDO. The argument would be that the same standard should apply as applies under old trust law cases, since the law of trusts is supposed to apply under ERISA. Under old trust law cases, a trustee's prudence is judged on the entire portfolio, not on each individual investment, standing alone. That sort of analysis makes sense for SDOs, because a participant may well choose an investment that is a counterbalance to another investment and only makes good investment sense when viewed in the context of the entire portfolio. If this analysis applies, the sponsor would be required to make a prudent selection of SDO provider, carefully design the SDO with that provider and monitor the operation of the SDO to ensure that it operates as it is designed.

Even if the fiduciary duty of prudent investment selection applies to the individual investments available through the window, it would not be impossible to meet. The prudent-investor duty does not require that the fiduciary select the absolute best investments, but the fiduciary should be sufficiently knowledgeable about investments to make the types of choices that a prudent investment expert would make. As a practical matter, this would mean that the universe of SDO investment vehicles should be defined and limited. That would still mean that hundreds, or even thousands, of vehicles could be available, so long as they all satisfy specified criteria, such as one would normally find in a plan's investment policy. And the fiduciary would have to have a system to permit it to conduct periodic reviews to ensure that it eliminates investment options that do not meet these criteria or that fail to satisfy the investment performance standards of a prudent investment policy.

The following is a detailed discussion of the principal types of investments that should not or must not be offered through an SDO.

Avoid fiduciary liability for maintaining the indicia of ownership of assets outside the United States

ERISA section 404(b) provides that it is a breach of fiduciary duty for a fiduciary to maintain the indicia of ownership of any plan outside the jurisdiction of the district courts of the United States. The regulations under ERISA section 404(c) provide that the requirements of section 404(b) continue to apply to a section 404(c) plan.
Congress enacted ERISA section 404(b) to protect plan participants against "runaway assets." It is fairly easy to imagine how a runaway asset problem could occur in an unrestricted SDO environment. Some business commentators have identified the Russian Republic as a hot business market, but one with risks because of the transition from communism to capitalism and widespread "gangsterism" in Russian society. A participant might invest in Russian business and might lose all or some of the investment because of illegal activity or for some other reason. If the "indicia of ownership" of the investment are not maintained within U.S. jurisdiction, then the participant could claim that it was a breach of fiduciary duty for the plan sponsor to permit the investment. In that case, the sponsor could be required to make up the losses, pay a civil penalty and incur liability for other equitable remedies.
In light of the fact that no ERISA section 404(c) protection is available to the plan sponsor in case of a violation of the "indicia of ownership" rule, the sponsor would want to ensure that no participant could direct his or her account to an investment that does not comply with section 404(b).3

Avoid fiduciary liability for making available investments not permitted by the plan document or that would jeopardize the plan's tax qualified status

ERISA section 404(c) protection is not available with respect to any instruction to invest in a vehicle that is not permitted by the plan document or that would jeopardize the plan's tax qualified status. Appropriate plan drafting could ensure that the plan-document issue does not arise. The sponsor would, however, want to ensure that any SDO does not permit investment in any vehicle that would jeopardize the plan's tax qualified status, such as a vehicle that has a high minimum investment amount requirement (such that it would cause the plan to fail the qualification requirement that rights under a plan be available on a nondiscriminatory basis).
Avoid fiduciary liability for permitting investment in a vehicle that could result in a loss in excess of a participant's account balance
ERISA section 404(c) protection is not available with respect to any investment instruction that could result in a loss in excess of the participant's account balance. 4 If the plan included an SDO, the sponsor would want to ensure that the participant is not able to invest in margin arrangements, commodities contracts, short selling and any other investments with a loss potential in excess of the participant's account value.

Avoid prohibited transactions

ERISA section 404(c) protection is not available for any investment instruction that would result in a direct or indirect:

Loan to the plan sponsor or any of its affiliates;
Acquisition or sale of real property that is leased to an employer of employees covered by the plan (or to an affiliate of the employer);
Acquisition of any employer security that is not a qualifying employer security (such as sponsor common stock); or
Sale, exchange or lease of property between the plan and the plan sponsor or any of its affiliates (other than the purchase or sale of a qualifying employer security or the acquisition or disposition of an interest in an investment fund managed by the plan sponsor or any of its affiliates).

To avoid potential fiduciary liability, the sponsor would want to ensure that the SDO would not permit a participant to make an investment that would run afoul of these rules.

In addition, regardless of whether an investment is problematic under the above rules, if it constitutes a prohibited transaction under the Internal Revenue Code rules, then the sponsor could be subject to prohibited transaction excise taxes.5 The Code prohibited transaction rules are similar to those listed above, but they include transactions between the plan and any fiduciary, the plan sponsor, an employee organization whose members participate in the plan and any person providing services to the plan, as well as some related persons (collectively, "disqualified persons"), and also include the following transactions:
Furnishing of goods, services or facilities between a plan and a disqualified person;
Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
An act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or
Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
Because of the so-called "plan asset" rules, adding an SDO can greatly increase the possibility that inadvertent prohibited transactions can occur under either ERISA, the Code or both. Under the plan asset regulations, 6 when a plan invests in an entity by purchasing a publicly-offered security registered under specified provisions of the Securities Exchange Act of 1934 or a security issued by an investment company registered under the Investment Company Act of 1940, the plan's assets are considered to consist of an interest in the entity, not in any of the underlying assets of the entity. If, however, the plan invests in other types of investments (which we will refer to as "nonregistered investments"), the general rule is that the plan is considered to invest also in the underlying assets, unless the nonregistered investment qualifies for exemption as an "operating company" or because equity participation in the nonregistered investment by benefit plan investors is "not significant." 7
This plan asset "look through" rule generally causes the managers of the look-through investment entity to become ERISA fiduciaries, and transactions involving the entity's assets to be subject to the prohibited transaction rules. For example, assume that a participant uses the SDO to purchase an interest in a real estate investment partnership that is not a registered investment, does not qualify as an "operating company" and in which investment by benefit plan investors does not satisfy the "not significant" test. The plan would be deemed to hold, not only a partnership interest, but also an interest in all of the underlying assets of the partnership. If it happened that the real estate investment partnership had an interest in real estate leased by the plan sponsor, the plan could have engaged in a prohibited transaction: the acquisition of real property leased by the plan sponsor.
Because of the complexities of the prohibited transaction rules, and the near impossibility of policing compliance if the plan holds nonregistered and nonexempt investments, the plan sponsor would want to ensure that the SDO only permitted participants to invest in registered investments and nonregistered investments that satisfy one of the exemptions that avoid the "look through" rule.

Avoid illiquid investments and investments not permitted by IRAs

Most plan distributions are made in cash or a combination of cash and sponsor stock. Thus, the distributions generally involve converting plan investments other than sponsor stock to cash. Despite this conversion requirement, most plans today can process distributions for payment on the same day that the distribution election is made. If an SDO is added to the plan, investments in the brokerage account would also have to be converted to cash and pushed back through the SDO window to the trustee for distribution. Usually, when a participant has an SDO through which s/he has invested only in mutual funds, it takes one or two extra processing days to convert the investment to cash and process the distribution. But if the SDO permits investment in a broader range of investments than mutual funds, the conversion may take even longer and may be problematic. If the investment is illiquid, how can it be converted to cash for distribution? What if a minimum required distribution must be made by the plan administrator, but assets cannot be converted to cash to make the legally required distribution? What if there is a substantial penalty for withdrawal or conversion? The sponsor may wish to establish investment guidelines that will ensure that any SDO does not permit illiquid investments or investments that impose substantial withdrawal penalties.

The sponsor should also consider the employee relations issues that may arise of the plan requires that all distributions be made in cash and/or company stock. Participants using an SDO may demand the ability to have SDO investments distributed in kind, which may increase the plan's administrative burden.

IRAs are not permitted to invest in life insurance contracts or "collectibles." 8 If these investments were permitted under an SDO, and rolled over in kind to an IRA, the rollover would be ineffective and would be considered a taxable distribution (at least as to the assets that may not be held by an IRA). If the plan permits, or may in the future permit, in-kind distributions of any investments other than company stock, the sponsor may wish to ensure that the SDO does not permit investment in life insurance contracts or collectibles.
Consider avoiding UBTI
Some investments, such as certain partnership investments, generate unrelated business taxable income under the Code, which would require the normally nontaxable trust to pay some income tax. It is legally permitted for a plan to have UBTI, but before investing in an UBTI-generating vehicle, the fiduciary should consider whether the after-tax return compares favorably with the before-tax return on more conventional investment vehicles. Since the nature of the SDO makes it impracticable for the sponsor to engage in this assessment, there is some question whether UBTI-generating investments ought to be permitted at all. If such investments were under consideration, the sponsor would also want to take into account the income-tax return and payment obligations that the plan may incur. These income tax obligations alone make most employee benefit plans reluctant to invest in vehicles that generate UBTI.
Other considerations
In order to maintain the plan's section 404(c) status, administrative procedures would have to be put in place to ensure that the information required to be provided to participants automatically and upon demand will be provided with respect to investments accessed through the SDO.
If participants are able to purchase sponsor securities through the SDO, SEC section 16 insider trading reporting and short-swing profits rules will come into play.
Administrative systems will be necessary to ensure that investments through the SDO are reported accurately and in a timely manner on the plan's recordkeeping system. These systems must also provide enough data for the designated party to ensure that information about the SDO is properly reflected on Form 5500 annual reports.

Plan assets are legally required to be valued at least annually. Only investments capable of proper valuation should be permitted and systems for ensuring that valuations are timely made must be put in place.

Additional participant disclosure and education may be necessary if the plan includes an SDO. It would be particularly important to convey information about risk factors and fee structures.
The sponsor should carefully negotiate an appropriate form of agreement with the SDO provider. In particular, the sponsor should ensure that the provider is liable for all consequences of any failure to satisfy the agreed-upon limitations on permitted investment vehicles and that the sponsor has the right to audit the operation of the SDO.

If an SDO is adopted, the sponsor must prepare plan amendments and revised communications concerning the SDO, including the different cost structure, the effect on the timing of plan transactions and any other relevant matters. If the plan is subject to the SEC prospectus requirement, then the plan prospectus must be updated and delivered in advance of implementation.

The sponsor should determine whether this arrangement will increase its fees for recordkeeping and other administrative services and or increase the cost of the plan's annual audit or inhibit reporting, recordkeeping and valuation.

Determine whether any dollar threshold for establishing a brokerage account would be deemed to discriminate against nonhighly compensated employees.

The sponsor would have to make arrangements with the provider to ensure that sufficient information is provided to the sponsor to permit it to fulfill its fiduciary duty of prudence concerning investment selection and retention.

Footnotes
1Section I of the Preamble to Regulation section 2550.404c-1.[^ back to article text]
2Several parts of this article discuss actions that could cause a breach of fiduciary duty. Under ERISA, if a fiduciary breaches his or her duty, a plan participant, beneficiary, other fiduciary or the Secretary of Labor may bring a civil action to enjoin the act or practice that causes the breach or to obtain other appropriate equitable relief. The breaching fiduciary is liable to make good to the plan any losses resulting from the breach and to restore to the plan any profits the fiduciary may have made through use of the plan's assets by the fiduciary. In addition, the fiduciary may be required to pay a civil penalty equal to 20% of any amount recovered from the fiduciary. Excise tax penalties may also be levied in case of a breach that is also a prohibited transaction, as discussed later in this article. (See sections 409 and 502 of ERISA.) [^]
3There is a major regulation expanding on, and providing for exceptions to, ERISA section 404(b). A discussion of that regulation is beyond the scope of this article. [^]
4Regulations section 2550.404c-1(d)(2)(ii)(D). [^]
5For each prohibited transaction, there is an excise tax of 15% of the amount involved. This accelerates to 100% if the prohibited transaction is not corrected within a short period.[^]
6Regulations section 2510.3-101. These regulations apply to the prohibited transaction rules under ERISA and the Code.[^]
7Under the regulations, an "operating company" includes a "venture capital operating company" and a "real estate operating company" that complies with extensive regulatory requirements. The regulations also set forth extensive requirements for determining whether benefit plan investment in an entity is "not significant."[^]
8A "collectible" is defined in Code section 408(m) as any work of art, rug or antique, metal or gem, stamp, most coins and any alcoholic beverage. Other tangible personal property may be designated as collectibles by the Secretary of the Treasury.[^]
© 1999 Pillsbury Winthrop Shaw Pittman LLP

MLS smacks down maverick website

June 21, 2008

MLS smacks down maverick website

By HAYLEY MICK



It was an antidote to Toronto's sprawling housing market: a simple website created by two self-described "computer geeks" to ease their first home search, and then help a city of frazzled buyers.

That is until this week, when the Multiple Listings Service - the reigning king of online listings in Canada - unleashed its lawyer on housing123.com and banished the new kids on the block.
"It was always this overhanging axe that was ready to fall," said Travis Fielding, the 31-year-old co-founder of the website, which allowed users to search MLS listings plotted on a Google map of local neighbourhoods.

After all, MLS has crushed upstarts before. Two Toronto-based sites, Realtysellers Ltd. and Realestateplus.ca, shut down in the past two years after run-ins with the Canadian Real Estate Association, which owns the MLS trademark. Housing123.com is accused of using its information without permission.

But some industry watchers say MLS may be losing this online turf war, as what's happening in the United States may soon happen here: Sites such as Redfin, Zillow and Yahoo Real Estate now carry the lion's share of new listings, while MLS is losing ground.

They say the MLS business model - giving people only a taste of a house and directing them to an agent for more - won't stand up against competitors that will give you every detail about a house and its surroundings, including local crime stats, school reviews and previous purchase prices, along with 360 tours and a break on the commission.

"They're basically saying, 'You know what? People want to search listings themselves,' " says John Pasalis, founder of Realosophy.com, a website that dishes details about Toronto and Greater Toronto Area neighbourhoods. "The problem in Canada is we can't do this because the real-estate boards don't allow us."

Adds Mr. Fielding: "I think they're stuck in the past."

The idea for housing123.com bloomed a couple of years ago after Mr. Fielding's friend and fellow software developer, Kevin Lai, became frustrated with his own home search. Sick of navigating MLS, and frustrated by an agent who missed good houses, Mr. Lai thought he could design a better system.

On his laptop, he basically created what is known as a "Google-map mash-up," which allows people to plot customized data (in this case, MLS listings) on top of a Google map application.
It worked so well that, just for kicks, he enlisted Mr. Fielding to help him take it to the public. It took about three weeks to work out the kinks, and they developed a way for the program to automatically add new listings. "On a scale of 10, it's probably like six," Mr. Lai, 29, says of the difficulty level. For their day jobs, he and Mr. Fielding design software for financial companies.
Since the site was launched 10 months ago, it averaged about 400 to 500 unique users per day, Mr. Fielding says.

Users appreciated its simplicity. House listings appeared as dots on a map of Toronto, which users clicked on to take them to the MLS listing. Houses were colour-coded by price so users could see which areas were pricey or affordable.

By contrast, MLS has no way to narrow a search to a neighbourhood. If you're looking for a Victorian in Kensington Market, you have to search in zone C-01, which covers Yonge to Dufferin, and Bloor to the Lakefront. (That includes the Annex, the waterfront, Kensington, Little Italy, Trinity-Bellwoods, University, the downtown core, and others.)

The search engine spits out hundreds of listings, and users are stuck flipping between MLS and Mapquest.

Still, the housing123.com founders knew it would just be a matter of time before MLS came knocking, because they were using listings that were the property of MLS.ca.

Last week, Mr. Lai received a letter from a CREA lawyer saying they had violated copyright laws. Remove the site, it said, or we'll sue.

"They were scraping data from our website," says Calvin Lindberg, president of CREA, which represents more than 94,000 brokers and agents. "It's something that we deal with on a regular basis. ... Obviously whenever we see it happening, we send a letter asking them to turn it off."
Since the site folded on June 15, dozens of users have voiced their dismay on a blog, urging the duo to keep going or seek legal advice. One user wrote: "MLS is brutal and your site made finding the right place in the RIGHT location a breeze."

By the end of the summer, MLS.ca will have a map component, Mr. Lindberg says. Beyond that, he says, the site does not need to be improved. "We've created a very effective and efficient system that the consumers love."

Others disagree. One simply has to look south to see the potential for informative sites, Mr. Pasalis says. Those sites, however, have only been made possible through tough legal battles. In May, the U.S. National Association of Realtors settled its antitrust case with the Department of Justice, giving online realtors - which have been offering fees that are significantly lower than traditional realtor rates - full access to the MLS database.

Mr. Pasalis says the onus should be on Canada's Competition Bureau, not individual entrepreneurs, to fight to ensure fair competition is allowed in Canada too.

For now, Mr. Lai and Mr. Fielding say they are dreaming up new projects. "At least we helped a lot of people find their dream home," said Mr. Lai, who is now in the market for a downtown condo.

The pair say they may revive their site, but only to post properties from individual sellers or brokers - not MLS. "We can't afford the lawsuit, that's for sure," Mr. Fielding says.

Days after his site folded, Mr. Lai and his wife bid on a downtown condo they had spotted using housing123.com - but no dice. His search has resumed on MLS.ca.©



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