4000 - Advisory Opinions
Self-Directed and Non Self-Directed Defined Contribution Plans--Deposit Insurance Rules Effective December 1993
September 17, 1993
Joseph A. DiNuzzo, Senior Attorney
This is in response to your letter of August 6, 1993, and our recent telephone conversation on the Federal Deposit Insurance Corporation's revised rules on the deposit insurance coverage of retirement accounts that become effective December 19, 1993.
According to your letter, ("Bank") serves as the custodian of certain defined contribution plans. The plan document (a copy of which you enclosed with your letter) specifically limits the investment of plan funds to deposits of the custodian/Bank. The plans are established by both "single employer/employee" and "multiple employer/employee" plans; both type plans limit the options available for fund investments to deposits of the custodian/Bank. You pose three questions.
The first is whether the plans would be considered "self-directed" for purposes of the revised insurance coverage rules. The term self-directed is a short-hand expression for the provision in section 330.12 of the FDIC's revised insurance regulations referring to "the right [of participants and beneficiaries] to direct the investment of assets held in individual [retirement] accounts maintained on their behalf by the plans." The published preamble to the revised rules explains that the FDIC "intends to interpret . . . [the term self-directed plans] . . . to mean only those plans where the plan participants have the right to direct funds into a specific insured institution." 58 Fed. Reg. 29,958 (May 25, 1993). In our view, for purposes of deposit insurance coverage, participants in a defined contribution plan in which the only investment option is the deposit product(s) of a particular insured depository institution are not directing "the investment of assets" of the plan. The rationale is that those individuals are not directing the placement of the plan assets with the insured institution. They are exercising no discretion in the process and have no control over the investment options of the plan. Also, it is possible that, in the future, the employer may amend the provisions of the plan to provide other investment alternatives.
This conclusion applies only if a plan consists of multiple employees. If a plan consists only of a single employer/employee (which you clarified in our telephone conversation as a one-person/employer defined contribution plan) we believe that, because the employer establishes the plan with a single-investment option, he or she does, in effect, direct the investment of plan assets. As such, we believe single employer/employee defined contribution plans which limit the options of fund investments to deposits of a particular insured depository institution would be self-directed for deposit insurance purposes.
Please note that, as indicated in section 330.12 of the revised insurance regulations, the aggregation rules for self-directed defined contribution plans apply only if a plan is one that is defined in section 3(34) of the Employment Retirement Income Security Act (29 U.S.C. 1002) or described in section 401(d) of the Internal Revenue Code of 1986 (26 U.S.C. 401(d)). Thus, in order for the aggregation rules to apply, the self-directed plan in issue would have to come within either of these two provisions.
Your second question is whether, under the revised insurance rules, an individual's interest in defined contribution plan accounts that are not "self-directed" would be added to his or her Individual Retirement Account deposit(s) held at the same insured depository institution. The answer is no. The aggregation rules in section 330.12 of the FDIC's revised insurance regulations include only IRAs, self-directed Keogh plan accounts, certain deferred compensation plan accounts and self-directed defined contribution plan accounts. An individual's interest in a defined contribution plan that is not self-directed would not be included in the new aggregation requirements.
Your last question is whether an individual's interest in accounts of a defined contribution plan that is not self directed would be entitled to "pass-through" (or per-participant) coverage, assuming the insured depository institution meets the applicable capital requirements. The answer is yes, based on section 330.12 of the FDIC's revised insurance regulations which provides that pass-through insurance coverage shall not be provided with respect to any employee benefit plan deposit accepted by an insured depository institution which, at the time the deposit was accepted, the institution may not accept brokered deposits pursuant to section 29 of the Federal Deposit Insurance Act (12 U.S.C. 1831f). As you know, whether an institution may accept brokered deposits depends on an institution's capital level. The recordkeeping requirements of section 330.4 of the FDIC's insurance regulations also would have to be satisfied for pass-through coverage to be available for such deposits.
I hope this letter is fully responsive to your inquiry. Feel free to phone at (202) 898-7389 with any other questions or comments.