Should an institution that handles the investments for a defined benefit (DB) plan on an employer’s behalf simply roll over the entire DB plan trust into an IRA for the benefit of the employer who is one of the participants in the plan, without asking questions?
Rev. 04/04/08, E-mail Alert 2008-5

No.

The DB plan has two participants, a husband and a wife. The husband in this case had directed the broker (who had handled the Defined Benefit plan since its inception) to directly roll the total sum in the DB into an IRA for the husband in the same institution…. and the broker does it?

This is blatantly incorrect.

The first issue is that assets can just not be rolled out of the plan without a distributable event such as plan termination. The question also has to be raised if there is more than one participant benefiting under the plan, before just moving all the money into an account benefiting the owner. The fact that there are two participants who have an accrued vested benefit in the DB plan would require the appropriate amounts for each participant to be distributed to each participant, or each participant could arrange to have the amount directly rolled over to each individual’s own IRA. Also, before there can be a rollover, there must be a lump-sum type payment rather than an annuity, and of course that means that spousal consents are required, notarized since the employer can not properly witness their own signature on behalf of the plan.

Of course there were other steps missing in regard to a termination of a DB plan.

This is surprisingly the second call on such an issue in as many weeks. The other call was about a Defined Contribution plan in which the only participants were the husband and wife. In that case also, the husband had directed that the entire plan balance be directly rolled to his IRA. And, again surprisingly, it was processed as requested --- and all within the same institution that had handled the defined contribution plan since its inception, and seemingly with the full knowledge that the husband and wife each had an account within the DC plan.

Is there a new type of spousal IRA mentality going around? : )