Tag: Fiducary

Self-Directed Brokerage Accounts within a 401(k) Plan? Issues Plan Sponsors Should Address

The typical 401(k) plan sponsor offers a mutual fund lineup of around 20 funds to invest personal and company contributions, and, even with that level of flexibility, hands-on investors are likely asking for more options. The Profit Sharing Council of America reports that the percentage of 401(k) plans with self-directed brokerage accounts (SDBAs) is growing, now above 20%.

401(k) plans with SDBAs offer a significant benefit to their participants, greater flexibility in investment options: more types of investments to choose from, more asset classes available including alternative asset classes such as real estate and commodities, and with certain plans, access to lower-cost investments. This greater flexibility in investment options offers plan participants more diversification and more refined investment strategies across all of their personal investment accounts. It also allows participants to hold relatively tax-inefficient investments in their 401(k) plan account, reducing their current annual tax bill.

The typical hands-on investor among your participants usually earns more, works with a personal financial planner and has more personal wealth, and that is often a good description of the company’s leaders. In addition, these hands-on investors might also be part of your plan’s retirement committee. But, SDBAs within a 401(k) plan are not for everyone. What issues should a plan sponsor consider if they are looking to add or expand the SDBA accounts available in their 401(k) plan?

Fiduciary Considerations and Participant Impact

If the plan sponsor has not implemented SDBAs to date as an investment option for participants, then the first issue to address or questions to answer are:

  • Is adding an SDBA feature really necessary.
  • Should the plan sponsor consider their participant group first, then their fund lineup?
  • How big is the group of hands-on investing participants and are they asking for more flexibility?
  • Are there asset classes that can be added to the current fund lineup to accomplish the objective?

A conversation with your investment advisor and current recordkeeper may result in enhancements to your investment lineup that satisfy the needs of your participants while maintaining a relatively simple and fully automated investment lineup for your plan.

The flip side of your hands-on investor group is the general makeup of your eligible participant population.  Recognize that the Department of Labor requires that all participants must be given the right to invest their 401(k) account through a self-directed brokerage account if the plan offers this feature. As a result, all eligible participants must be notified of the SDBA option, including related fees and account charges.

We know that many participants should stay away from self-directing their retirement accounts; they lack the time, discipline or willingness to do it themselves through ongoing research and actions to effectively manage their SDBA. They may be unwilling to hire an advisor due to cost, they may have an incomplete understanding of risk and return in asset classes, and they may engage in emotional investing, all leading to poor investment outcomes. The latest Charles Schwab SDBA Indicators Report bears this out:  it showed that participants who work with an advisor have higher balances, a more diversified asset mix, and less exposure to individual stocks than non-advised participants.

Also, the Department of Labor has expressed concerns regarding the range of investments that should be made available due to risk and return, reasonableness of fees charged by an advisor, and using investments through the brokerage window. ERISA Section 404(c) has a specific exclusion for investments where the risk of loss exceeds the participant’s account balance.

Carefully evaluating the participant group may cause some plan sponsors to limit investments in SDBAs to only a percentage of the total account, and restrict or prohibit investments in limited or general partnerships, options, futures and other derivatives, margin trading and other forms of investments with potential risk.

Finally, choosing the broker and negotiating the broker’s fees and other charges may be a fiduciary act, particularly if the fiduciary is limiting the number of advisors and brokerage firms available to one or a select few.

Plan sponsors and named fiduciaries may be under the impression that implementing self-directed brokerage accounts minimizes fiduciary risk, but there can still be fiduciary obligations that if not met, can trigger liability.  Beyond ongoing fiduciary risks, there can be significant operational issues that are unique to 401(k) plans with SDBAs.

Operational Issues

Historically, self-directed brokerage accounts have been a feature of 401(k) plans sponsored by law firms and medical practices, but these plans have now become much more prevalent across US employers, although with restrictions on the brokerage firm and advisors available.

As the recent Charles Schwab survey indicates, plan participants with larger account balances prefer to work with a professional advisor, specifically a personal investment advisor who knows their full financial picture and participates in their lifetime financial planning. If plan participants can select their own investment advisor for their accounts, maintaining the plan becomes more complex and more expensive to administer.

More Complexity 

Many recordkeepers and administrators have developed their own automated and proprietary solution for self-directed brokerage accounts, catering to larger employers who represent the majority of plan sponsors offering a self-directed brokerage account option in their plan. A single brokerage firm approach for self-directed brokerage accounts significantly limits the investment advisors available to the participant, so this approach is unlikely to work for participants with larger balances, who also often are the key leaders within the organization.

Allowing those key leaders to work with their personal investment advisor forces the benefits team or administrative staff to manually maintain these separate accounts, involving a number of additional steps, many or all of them manual:

  • Excluding participants with outside brokerage firms from the payroll feed and deposits to the recordkeeper for the rest of the plan,
  • Separate checks or electronic transfers to each individual brokerage firm,
  • Logging all transactions and verifying receipt with each individual brokerage firm,
  • Resolving any issues that arise with the individual brokerage firm,
  • Providing separate, aggregate reporting of all plan participants for compliance testing, and
  • Even taking on the role of the plan’s recordkeeper in developing personal plan statements for each participant with a separate self-directed brokerage account, summarizing annual activity in the plan account.

In this manual environment, those participants who self-direct through a separate brokerage firm are ‘off-line’:

  • They do not have access to an online 401(k) participant portal
  • Participant service and support is provided by the employer’s internal staff
  • May not receive a participant summary statement (an ERISA requirement) unless it’s provided by the plan sponsor.

More Expensive

The manual processes involved in working with multiple brokerage firms creates additional internal expense and additional compliance and fiduciary risk for the organization that chooses to work around their recordkeeper’s limitations. The plan sponsor may also incur additional hard dollar expense by hiring its accountant or another third party administrator to consolidate and summarize the assets held across all accounts for the plan in total and reconcile to participant accounts, a necessary step for completing the plan’s Form 5500 annual disclosure filing. Also, if the plan sponsor’s 401(k) plan has more than 100 participants, this expense becomes an annual, necessary expense for a full scope audit as required by ERISA when there is no certified trust statement covering all assets held by the plan.

At Last – Resolving Issues with a Single Solution

When choosing to add or expand the availability of SDBAs in a 401(k) plan, it can feel like, “No good deed goes unpunished”. But, solutions are available that offer greater flexibility to participants at reasonable cost and reduced fiduciary risk. Solutions such as Professionals Choice Retirement PlanTM simplify the multi-vendor approach, allocate plan fees judiciously, and offer participants complete investment freedom to utilize their personal financial advisors. This open architecture personal advisor solution enables fiduciary management with fully- transparent and outsourced professional 401(k) plan administration. Plan sponsors should have a conversation with their investment advisor, their recordkeeper and other advisors to understand what solutions are available that best meet both plan sponsor and participant objectives.*

 

*Investment advisory services provided via Professionals Choice Retirement Plan are offered through Strategic Retirement Partners (SRP), an SEC registered investment advisor. Findley provides administrative and recordkeeping services, is not a broker/dealer or an investment advisor and is a separate entity from SRP. SRP and Findley are separate entities from LPL Financial.

Summer Homework for Fiduciaries

As you bask in the glory of summer over the next couple of months, don’t forget the three Fs that define this cherished season — fun, Fourth of July, and fiduciary! While you’re enjoying the fruits of summer, don’t forget your fiduciary responsibilities! Ask yourself the following questions to make sure you are on top of your responsibilities and liabilities.

  1. Are you practicing procedural prudence when making plan management decisions?
  2. Do you clearly understand the DOL’s TIPS on selecting and monitoring your QDIA in order to manage fiduciary risk?
  3. Are you documenting each plan management decision and its support?
  4. Are you familiar with current trends in fiduciary litigation?
  5. Are you certain that your plan is being administered in accordance with your plan document provisions?
  6. What fiduciary liability mitigation strategies are you following? (Fiduciaries are personally financially responsible for any fiduciary breaches that disadvantage participants.)
  7. Are you kept abreast of regulatory changes?
  8. Are you appropriately determining reasonableness of plan fees, services and investment opportunities?
  9. How do you define “success” for your plan and what metrics do you use to track progress?
  10. Is your current plan design communicating the appropriate messaging to encourage success for your participants and plan fiduciaries?
  11. Is your menu efficiently designed for benefit of participants and plan fiduciaries?
  12. Are you certain you are providing all required communications and distributions to plan participants (including former participants with account balances)?
  13. Are you handling missing participants appropriately?
  14. Are you appropriately monitoring and documenting your fiduciary activities and those of your service providers?
  15. Are you maintaining plan records appropriately?

Many fiduciaries are unaware of their fiduciary responsibilities or do not understand them. As you contemplate these important questions while staying cool this summer, if you need help uncovering the answers to any of these important questions, do not hesitate to reach out to SRP Managing Director.

 

Spring Cleaning for Your Retirement Plan

Spring is in the air and now could be a great time to do a little spring cleaning for your retirement plan. Here’s a few quick things you can do help ensure your plan is in tip top shape:

Fiduciaries and Investments
1. Review your plan governance documents to make sure none of your plan fiduciaries need to be updated.
2. Make sure that your ERISA bond and fiduciary insurance is up to date and reflects the correct amounts for your plan.
3. Confirm that you have all copies of your plan investment reviews and any minutes. In addition, check to be sure any action items from the minutes are completed.

Operations and Procedures
1. Take a look at your current procedures for things like loans, QDRO’s, distributions, and enrollment to be sure they don’t need updating.
2. If you’ve had any changes in your HR or benefits staff that handles the plan, be sure that the procedures they are following match your plan document and operational procedures.
3. Make sure you have copies in your files of any notices or communications to participants along with the date and method they were distributed.
4. If you have any terminated participants with balances, make sure you are following a process to contact them and for small balances completing the force out process.

For any questions on spring cleaning for your plan or more information, please contact your SRP Managing Director.