Is it prudent for fiduciaries to offer self-directed brokerage accounts or windows (collectively “SDBAs”) in retirement plans now? The answer to this question is a very strong….maybe.
It is difficult to take opposition to the argument that a plan desires to provide greater flexibility to participants who may be well-equipped to make their own investment decisions, or helping to facilitate a participant’s desire to work with a registered investment advisor (RIA). However it remains a fiduciary decision and thus subject to the standards and rules set forth by ERISA. Since SDBAs must be made available for everyone in a plan, the answer isn’t so clear cut.
It is true that the DOL’s 2013 apparent acquiescence to the investment industry’s request to soften its original determination that SDBAs be treated as designated investment accounts (DIAs) afforded some fiduciary comfort. This occurred with issuance of the Field Assistance Bulletin (FAB) 2012-02R which allowed that unless a plan specifically identifies that its SDBA is a DIA in communications to participants, the implication is that it is not a DIA. While offering this accommodation, the DOL then raised the possibility that additional disclosures regarding the investments included might be required. DIAs (core menu investments) require plan fiduciaries to apply a higher standard of monitoring and disclosure of fees and information to plan participants. An SDBA, at a minimum must disclose:
- How the SDBA works – how and to whom investment instruction must be provided, account balance requirements, restrictions/limits on trading, how the SDBA differs from the plan’s DIAs and who to contact with questions.
- Fees and expenses – an explanation of what may be charged to individual accounts in connection with SDBA start-up fees, ongoing fees and fees/commissions charged in connection with the purchase (including front-end and back-end loads).
- Quarterly recap of fees – a quarterly recap of fees charged against accounts and services to which they pertained.
DOL Concerned that Participants Could Make Mistakes
The DOL’s concern centers on the fact that participants who are not confident investors are more likely to make investment/allocation mistakes with the more exotic investments typically available in SDBAs. The DOL’s concern is reasonable and may eventually result in litigation and/or additional regulatory guidance regarding the offering of such investment vehicles in retirement plans.
Moreover, the DOL is concerned about fiduciaries attempting an “end-run” around the DIA disclosure requirements by use of SDBAs as the sole investment vehicle. In fact, the DOL went so far as to state:
“ . . . in the case of a 401(k) or other individual account plan covered under the regulation, a plan fiduciary’s failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raising questions under ERISA section 404(a)’s general statutory fiduciary duties of prudence and loyalty.”
Fiduciaries Still Responsible
Plan fiduciaries do still retain the responsibility for selecting and monitoring the SDBA product under DOL procedural prudence guidelines. One step in this process is the determination that an SDBA is appropriate for the participant base and reasonable in fees and services. This may prove to be a difficult decision to defend if tested in court, which it very well could be in the future as plan-related litigation continues to evolve and proliferate. Will the court be swayed in favor of the prudence of the SDBA due to its utilization by a small percentage of highly compensated employees (as is typically the case), or will they be disposed toward the plaintiff participants nearing retirement who watched their account balance drop by 60 percent the year before they retired who are claiming they didn’t understand the volatility of the investment they selected? Remember, fiduciaries have a responsibility to monitor the performance and fees of all the investments within the core menu of their plans, so there is reasonable opportunity to manage the investments included.
Highly compensated employees, who are most likely to utilize an SDBA, will either have a personal advisor to help sort through the options or will have assets outside the plan with which they can explore more exotic investments. The less sophisticated, non-highly compensated employees likely have neither option realistically available to them.
Plan Fiduciaries Must Take the Following into Perspective
- Do the demographics of the plan indicate that an SDBA would be properly utilized? In other words, is it a prudent vehicle?
- Can the SDBA be limited in scope in some manner to limit the potential harm a less sophisticated investor may inflict on him/herself?
- Can the fiduciaries determine the cost structure and reasonability of fees of the SDBA?
- Can participants achieve proper diversification for less expense using DIAs rather than using the SDBA (participants rarely realize that investments purchased through an SDBA are bought at retail whereas their plans are institutionally priced – and experience has shown that participants often buy more expensive share classes of a fund in the SDBA that’s available for less as a DIA in their plans!)
- Can the fiduciary prudently select the provider of an SDBA? Can he/she evaluate the services being provided? For example, the SDBA provider’s experience and expertise, their licensing, the quality of the service, the security of the account?
- How will the fiduciary actively monitor the SDBA provider after initial selection? How will he/she know if material changes to the information gathered during the selection process have occurred, including whether he/she continues to meet Federal and state regulation?
- How will he/she monitor whether the SDBA provider is living up to its contractual obligations?
- Can the fiduciary provide all the needed disclosures?
Is it Worth the Liability?
The bottom line question for the fiduciary is whether it is worth potentially taking on more liability exposure to allow access to an SDBA for a likely limited number of vocal/powerful interested participants?
The weight of the responsibility in most scenarios, and there will always likely be a set of facts and circumstances that dictates otherwise, will typically overwhelm the desire of the select vocal few. Fiduciaries have to take the most prudent course of action possible and act in the best interests of their participants . . . all of their participants.
