Does your 401k Plan Offer the Elusive Self-Directed Brokerage Option?
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As a result, you don't find them being discussed much in the press or in retirement industry publications. This archive contains not only the most current material on the topic, but also older items that are still relevant, provide background, perspective or are germane to the topic. If you find a broken link or an items that you feel is outdate, irrelevant or no longer appropriate, please let us know. To subscribe to our free weekly newsletter, enter your email address below then click the "Join" button.
Do the Risks Outweigh the Rewards. More k and b plan sponsors are offering an investment option called a brokerage window. However, more choice isn't always better when it comes to the investment menu.
And some sponsors have the misconception that offering a brokerage window relieves some of their fiduciary responsibilities. That is not the case, while the Department of Labor does not prohibit the use of brokerage windows in retirement plans, it has shown increased interest in them in recent years.
Understanding Self-Directed Brokerage Accounts. A recent article published by the Wall Street Journal suggests more plan sponsors are adding self-directed brokerage accounts to their corporate retirement plans. But what exactly is a self-directed brokerage account, and is adding one to your plan a good idea?
On September 22,the SEC released a Compliance and Disclosure Interpretation addressing the application of the registration requirements to offers and sales of employer securities under k plans that i do not include a company securities fund but ii do allow participants to select investments through a self-directed brokerage window.
Open brokerage windows typically allow plan participants to invest their k accounts in publicly traded securities, including, in the case of a public company employer, company stock. Should the plaintiffs succeed in their calms that it was imprudent to permit employees the ability to invest in a wide range of securities without fiduciary oversight, it may well be the death knell of SBDAs.
Brokerage Account Windows in Your k Plan: The SEC recently published a new interpretation discussing the requirements for registering an offering of employer stock on a Form S Limits on k Plan Brokerage Self directed brokerage option in 401 k. Companies that allow employees to purchase employer stock through their k plans are already well aware of the securities law requirements and restrictions related to that plan feature.
However, what if a plan with no employer stock investment alternative is modified to include a brokerage window that does not prohibit employee contributions from being invested in employer stock? Could this constitute an offer of employer stock requiring Securities Act registration?
The SEC recently weighed in on whether offering a brokerage window in a k through which investments in employer securities can be made involves an offer of employer securities requiring Securities Act registration. A recently filed lawsuit rekindled some self directed brokerage option in 401 k concerns about self-directed brokerage accounts. The lawsuit in question is Fleming v Fidelity Management Trust Company which was filed by a group of participants in the Delta Airlines retirement plan against Fidelity alleging breach of fiduciary responsibility for excessive fees charged to their brokerage accounts.
Undesired Elements for Plan Fiduciaries. Some retirement plans are utilizing Self-Directed Brokerage Accounts as the primary investment vehicle for plan participants, but using this element instead of a recordkeeping platform is potentially formulating undesired results.
There are numerous fiduciary and participant related considerations that typically outweigh the investment flexibility benefit that SDBAs offer. A proposed class action accuses Fidelity Management Trust Co. Practical Considerations on Brokerage Windows in k Plans. Plan committees need to ask questions, and get answers, before offering a brokerage window. Should the committee offer one at self directed brokerage option in 401 k If it does, what is the process for selecting and monitoring the window and its provider?
This column by Fred Reish looks at these and other questions about brokerage windows in participant-directed plans. Plan sponsor, with self-directed brokerage accounts in their plans, may unknowingly expose themselves to liability.
This article is about the hidden dangers of k plans in offering self-directed brokerage accounts to plan participants. Brokerage Windows in Retirement Plans.
If the DOL does issue further guidance with respect to brokerage windows, such regulations or guidance could have a wide-ranging effect. This article reviews the regulator history and the effect of brokerage windows on fiduciary duties. Responding to a request for information from the DOL, most industry groups said they believe no further self directed brokerage option in 401 k is necessary to govern use of brokerage windows in retirement plans. The DOL recently released a request for information concerning brokerage windows in k plans.
The RFI includes 39 questions covering definitional issues, plan offerings, participation, selection, information available to fiduciaries, costs, disclosure, the role of advisors, fiduciary duties and reporting. Brokerage Windows in k Plans: Author writes, "I know the argument for brokerage accounts in retirement plans. Sophisticated investors want the choice to invest in whatever they want, whenever they want. By eliminating self directed brokerage option in 401 k brokerage option we are self directed brokerage option in 401 k the knowledgeable investor.
Good philosophy, but poor logic. Allow me to retort. On August 20,the DOL published a request for information on the use of these brokerage windows k plans.
The DOL's self directed brokerage option in 401 k in issuing the request for information is to assist the DOL in determining whether, and to what extent, regulatory standards or other guidance concerning the use of brokerage windows may be necessary to protect plan participants. Brokerage Account Windows Shutting in k Plans. Recently the Department of Labor indicated they intend to provide additional guidance on the use of brokerage account windows.
Experts believe it is likely to be unfavorable for brokerage window proponents. Choosing to offer an SDBA option should not be a scary ordeal. However, plan sponsors need to be aware of self directed brokerage option in 401 k fiduciary obligations. Do not fall victim to claims that offering an SDBA shifts more liability away from the plan sponsor as opposed to a traditional c plan. Article lays out issues to consider before implementing an SDBA. Brokerage Window Issues Still Open. Offering a brokerage window investment option in a defined contribution DC retirement plan allows plan participants to set up retail accounts with investment brokers of their choice and they can access a wide variety of investment vehicles.
The idea is to give plan participants ultimate investment control. Concerns have arisen though, because, under ERISA, all retirement plan investment options must be self directed brokerage option in 401 k and evaluated.
Therefore, how do plan fiduciaries monitor and evaluate all the investments selected by participants who use these accounts? Brokerage windows on k plans really give investors unlimited investment choice.
But the verdict is still out on whether a plan sponsor is fulfilling their fiduciary duty with a brokerage window: It may be easy to assume that a plan's providers will automatically make proper fee disclosures in self directed brokerage arrangements. However, the Participant Disclosure Regulation places the legal burden squarely on the shoulders of the plan fiduciaries and some broker-dealers providing brokerage accounts say they are unable to provide the information.
While fiduciaries can rely -- to a degree -- on qualified providers, they should at least take the steps to form a reasonable belief that the requirements are being satisfied. Fiduciary Considerations in Offering a Brokerage Window. White paper discusses the fiduciary process for deciding whether to offer a brokerage window and selecting the provider of the window; the requirements under the new participant disclosure rules; and the implications of the fiduciaries or a participant selecting an RIA to serve as an investment manager or advisor for a participant's individual brokerage window.
The approach is particularly popular in small professional practices. This article addresses the specific issues that apply to a plan that provides the SDBA as the only investment option. The reasons for the confusion are manifold as practitioners are struggling to absorb and understand two difficult sets of fee disclosure regulations and a complicated FormSchedule C.
In this Technical Update, Sungard will address how the participant fee disclosure regulations apply to a plan with self-directed brokerage accounts. Questions and Answers on Brokerage Accounts. This article focuses on plans which provide participants the option to direct their investments through brokerage accounts, and do not otherwise provide a set of designated investment alternatives DIAs for participant selection. The DOL clarified that brokerage windows are not considered designated investment alternatives and that the regulation doesn't prohibit the use of these brokerage accounts.
The agency said that plan fiduciaries, however, still have a duty of prudence and loyalty self directed brokerage option in 401 k participants who use the brokerage window -- including taking into account the nature and quality of services provided. Field Assistance Bulletin No. More Oversight for k Brokerage Windows. If you have a plan self directed brokerage option in 401 k a brokerage window or are contemplating one, it's very important to consider Department of Labor guidance issued in May and subsequent statements that raise new questions about what is a prudent level of disclosure and monitoring for brokerage window investment alternatives.
What has caught plan advisers off guard is that the DOL is appearing to take the position that plan sponsors and fiduciaries have a duty under ERISA to monitor and review the investment selections that participants are making through brokerage windows in their k plans-not just the investment funds offered by the plan.
The DOL's Field Assistance Bulletin issued on May 7, included new participant fee disclosure requirements for brokerage windows and self directed brokerage option in 401 k self-directed brokerage arrangements. These new surprise requirements may pose a challenge for plan administrators and service providers.
Using the brokerage option offered through some employers' k plans could be a good way to maximize asset class diversification and integrate the highest quality funds into your portfolio. The brokerage window isn't for everyone, though.
It appears, according to recent survey data, that self-directed brokerage accounts are being rediscovered by a whole new generation of k self directed brokerage option in 401 k. In its survey, Trends and Experience in k Plans forHewitt Associates noted that more plan sponsors were offering employees the option of a self-directed brokerage window.
But, letting k plan participants jump through the brokerage window is tantamount to self directed brokerage option in 401 k the inmates run of the asylum. Covers the pros and cons, plan sponsor fiduciary responsibilities regarding self-directed brokerage accounts, steps to take if the plan has self-directed brokerage accounts and other issues. When the market takes a nosedive participants grow grumpy and start complaining about investment performance and the options available on their retirement plan menus.
That is why now might be a good time for plan sponsors to at least consider the idea of offering their employees a self-directed brokerage account window. A dividend of LaRue is that it may cause employers to step back and reconsider self directed brokerage option in 401 k current, expensive, and dangerous fad of self-direction. Plan participants often expect that self-directed brokerage accounts offer more choices and wealthier retirement prospects than do managed model portfolios; plan sponsors might expect less liability.
But the substantial under performance, restrictions, costs, and liabilities of such plans dictate that caution is in order. Self-directed brokerage accounts can be offered to k plan participants without compromising protections under ERISA Section c. This column explains why and how. Individual directed brokerage accounts IDAs are increasingly popular with both plan participants and plan sponsors.
Fortunately, there are several practical approaches that a sponsor can adopt to more effectively manage liability, operational and cost issues. In addition, the article illustrates a transition plan for moving from a less effective to a more effective brokerage account structure.
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