| Many small self-directed retirement plans provide each participant with his/her own self-directed brokerage account (SDBA) rather than a platform of funds from which to choose. Plans often use the SDBA approach for participant direction because they have insufficient assets to qualify for a platform of investment. Others choose this approach because it provides the owners more flexibility in selecting investment options. The approach is particularly popular in small professional practices (e.g., doctors). In this Technical Update, we will address the specific issues that apply to a plan that provides the SDBA as the only investment option.
If a plan allows each participant to select his/her own self-directed brokerage account (SDBA), does the plan fiduciary need to be involved in the selection of the brokerage account provider?
Yes. ERISA’s fiduciary duties of prudence and loyalty to participants require the fiduciary to take into account the nature and quality of services provided by the broker. Comment: Fiduciaries for plans that allow a participant to select his/her own brokerage provider will, at a minimum, need to review and monitor the selection of the brokerage provider. Obviously, complying with the disclosure requirements becomes more difficult with more brokerage providers.
Would the plan need to provide disclosures to all participants and beneficiaries with respect to each brokerage account provider?
Yes. Just as a plan cannot limit brokerage account disclosures to participants using the accounts, a plan offering a choice of brokers cannot limit the disclosures to the broker the participant chooses
Can the plan limit the disclosures for a particular brokerage account provider to the participant who actually selected that brokerage account provider?
No. The plan must provide the disclosures to all of the participants to whom the accounts are available.
What fee disclosures must a plan make to participants and beneficiaries with regard to SDBAs?
The plan must disclose the fees that would be charged against the participant’s individual account in connection with the SDBA. This includes (1) set-up and termination fees, (2) ongoing maintenance fees, including fees relating to inactivity or to minimum balance, (3) commissions, fees, and other charges relating to the purchase or sale of securities. It does not include the fees or expenses of the specific investments the participant selects, such as 12b-1 fees.
Is there an alternative method of disclosure to providing the commissions and fees (item 3 in the prior question) with respect to each brokerage account provider to each participant?
Yes. The plan administrator may provide a general statement that such fees exist and they may be charged against the account, and directions as to how the participant can obtain information about such fees in connection with a particular investment (e.g., website address).
Will a plan with SDBAs only be able to qualify for the fiduciary protections of ERISA §404(c)?
Probably. Certainly the plan allows sufficient participant control, offers a broad range of investment choices and allows the participant the ability to make regular investment changes. However, the DOL could contend that the unlimited investment choice makes it too difficult for an unsophisticated participant to select the appropriate investment choice. Furthermore, the DOL may argue that the unlimited investment choices may make it very difficult for the plan to provide appropriate information to educate participants on their investment choices.
We will discuss the application of the fee regulations to self-directed brokerage accounts in our live classroom ERISA Workshop scheduled in October and November. Sample completed disclosure forms for a plan with self-directed brokerage accounts will be included in the program materials. See below for details and to register online.
ERISA Workshop – 22 Cities - Register Now
See complete agenda and register online here: www.relius.net/Events/events.aspx?Seminar
401(k)Plans Beyond the Basics – 2 Locations Left!
See complete agenda and register online here: www.relius.net/Events/events.aspx?Seminar
Upcoming Web Seminars: featuring
Fundamentals of 401(k) Plans – 12-part Web seminar series, October thru December. Titles of the 12 segments: eligibility; vesting; identifying HCEs and key employees; coverage testing; 401(k) testing - ADP, ACP, and catch-ups; introduction to nondiscrimination testing; top-heavy testing; compensation; 415 limit and deductible contributions; taxation and distribution; controlled groups; plan loans. Bundled registration price is available.
The Dirty Dozen: Correcting the Most Common Plan Errors, October 23, 2:00 p.m. ET
The Ins and Outs of Benefits, Rights, and Features, October 26, 12:00 p.m. ET (earlier start time)
Ethics: A Case Study Approach, November 1, 2:00 p.m. ET and repeated on December 13
The Fundamentals of Cross-Tested Plans - A 3-part program, November 6-7-8, 2:00 p.m. ET each day
Visit our Web site at www.relius.net/Events/events.aspx?Web for more details and to register online.
Save the Dates:
Orlando Advanced Pension Conference – February 6-8, 2013
Just for ERPAs Workshop, Orlando, FL – February 5, 2013
Final details and online registration will be available in November, here: www.relius.net/Events/events.aspx?Conference
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