The last topic we'll address that stems from the fact that LOSAP assets are municipal assets and not participant assets is the idea of investment direction by the participant.
Most are familiar with a typical 401(k), 457 or IRA account, where a menu of investment options are available for the participant to select. Some plans even offer target funds, or actively managed options. So we often get questions about Defined Contribution LOSAP accounts, and if participants can direct the investment of his/her LOSAP account.
As a preface, it must be said that we cannot find any formal guidance from the IRS on this issue. We have done a lot of research and digging and are not able to locate anything. So our understanding is based on other types of guidance available, including commonly accepted practice. We strongly suggest you seek advice from an attorney with expertise with the Internal Revenue Code.
That said, it appears the answer is no, a participant cannot actually direct the investment of his/her DC LOSAP account balance. This seems logical, because the assets are sponsor assets. But again, our research comes up empty in terms of formal guidance from the IRS.
HOWEVER - there seems to be an accepted "workaround" for this. How it must be structured is that the participant selects hypothetical investment options provided by the sponsor. The documentation must be clear that these are hypothetical options, and the sponsor is not under any obligation to actually invest the money in a manner constant with that hypothetical investment.
So for example, let's say the hypothetical investment option was Apple stock. To keep the bookkeeping easy, the sponsor would then actually invest the account balance in Apple stock, even though it is technically not obligated to do so. This thin veil seems to be acceptable.
Typically, including the option for a participant to direct his/her own account balance would result in additional administration fees. Plus, the Trust Document/Agreement would have to be specially drafted to include the proper language. A plan sponsor should carefully consider these additional fees, and get advice from their own legal counsel, before allowing participants to direct the investment of their LOSAP accounts.