Brokerage accounts vs. windows

[Bird]

Q30 of the FAB (below) seems to blow away the "don't worry about the chart" mentality that I had with regard to brokerage windows "and similar arrangements" -

that's my question; does anyone think a brokerage account arrangement (where there's no "platform", just accounts for each participant and they can do whatever they want) is not a "similar arrangement? They do use the word "platform" but I think it's a stretch to think that just because accounts aren't linked under (what I call) a platform they're not caught in this.

(Kinda stinks that they would essentially re-write the regs in this way, late in the game.)

Q30: A plan offers an investment platform consisting of a large number of registered mutual funds of multiple fund families into which participants and beneficiaries may direct the investment of assets held in or contributed to their individual accounts. Although the plan fiduciary selected the platform provider, the fiduciary did not designate any of the funds on the platform as "designated investment alternatives" under the plan. Is this platform itself a designated investment alternative for purposes of the regulation?

A30: Paragraph (h)(4) of the regulation specifies that a brokerage window or similar arrangement is not a "designated investment alternative." A platform consisting of multiple investment alternatives would not itself be a designated investment alternative. Whether the individual investment alternatives are designated investment alternatives depends on whether they are specifically identified as available under the plan. As the Department explained in the preamble to the final regulation (75 FR 64910), when a plan assigns investment responsibilities to the plan's participants and beneficiaries, it is the view of the Department that plan fiduciaries must take steps to ensure that participants and beneficiaries are made aware of their rights and responsibilities with respect to managing their individual plan accounts and are provided sufficient information regarding the plan, including its fees and expenses and designated investment alternatives, to make informed decisions about the management of their individual accounts. Although the regulation does not specifically require that a plan have a particular number of designated investment alternatives, the failure to designate a manageable number of investment alternatives raises questions as to whether the plan fiduciary has satisfied its obligations under section 404 of ERISA. See generally Hecker v. Deere, 569 F.3d 708, 711 (7th. Cir. 2009). Unless participants and beneficiaries are financially sophisticated, many of them may need guidance when choosing their own investments from among a large number of alternatives. Designating specific investment alternatives also enables participants and beneficiaries, who often lack sufficient resources to screen investment alternatives, to compare the cost and return information for the designated investment alternatives when they are selecting and evaluating alternatives for their accounts.

Further, plan fiduciaries have a general duty of prudence to monitor a plan's investment menu. See Pfeil v. State Street Bank, 671 F.3d 585, 598 (6th Cir. 2012). If, through a brokerage window or similar arrangement, non-designated investment alternatives available under a plan are selected by significant numbers of participants and beneficiaries, an affirmative obligation arises on the part of the plan fiduciary to examine these alternatives and determine whether one or more such alternatives should be treated as designated for purposes of the regulation.

Pending further guidance in this area, when a platform holds more than 25 investment alternatives, the Department, as a matter of enforcement policy, will not require that all of the investment alternatives be treated, for purposes of this regulation, as designated investment alternatives if the plan administrator—

makes the required disclosures for at least three of the investment alternatives on the platform that collectively meet the "broad range" requirements in the ERISA 404© regulation, 29 CFR § 2550.404c-1(b)(3)(i)(B); and

makes the required disclosures with respect to all other investment alternatives on the platform in which at least five participants and beneficiaries, or, in the case of a plan with more than 500 participants and beneficiaries, at least one percent of all participants and beneficiaries, are invested on a date that is not more than 90 days preceding each annual disclosure.

[shERPA]

We have a number of plans with self-directed brokerage accounts. There is no platform or window, just FBO accounts. IMO this is clearly a "similar arrangement" as described by the FAB.

The simple answer is that plans like this will not be in compliance with the requirements of Q&A 30 as there is no monitoring of the investments by the employer or anyone else. Indeed some of the doctors and lawyers with plans like this absolutely don't want their partners to know what they invest in. And many of these plans have the brokerage accounts at different firms, based on the financial advisor each participant works with.

Nice how DOL drops this bomb on short notice circumventing the normal propose/comment process of developing regulations. I read where some group pushed back that this is a new requirement that should go through the process but DOL is standing its ground.

One of my clients like this is a medical group with 40 docs. I suppose I could recommend spinning off into 40 separate single participant SH 401(k) plans, each of which is trustee-directed and self trusteed. Great way to generate fees but hardly consistent with the intent of the regs and a waste of my client's money.

Waiting, hoping, for some other insights on this before I tell my clients - and what to tell them!

The results of government action are never as intended, and it's always a surprise.

[Bird]

Thanks for the feedback. At least we see it the same way.

[Jim Chad]

FWIW - I think someone in my office will be putting together excel spreadsheets and we will charge by the hour to do this.

I need to vent. WHAT AN INCREDIBLE WASTE OF MONEY? WHY DOES THE DOL WANT EVERY 401(k) PLAN CANCELLED AND REPLACED WITH A SEP OR SIMPLE??????

Thank you, I feel better now.

[Belgarath]

Why wouldn't Q&A-13 apply to your situation, rather than Q&A-30? So althought there is disclosure, there's no "comparative chart" requirement. I think even the DOL recognizes that no comparative chart is possible in these situations.

[shERPA]

Yes, Q&A 13 applies. I assume Jim is suggesting putting the spreadsheets together to identify overlapping investments within the brokerage accounts to attempt to comply with Q&A 30.

I say "attempt" because if there are any participants who are active traders, the 5+ threshold could be hit on any single day, so it would seem that all activity for all accounts would have to be tracked on a daily basis. I'm virtually certain none of our clients will be willing to pay what this would cost. This might make the separate plans look inexpensive.

[Bird]

FWIW - I think someone in my office will be putting together excel spreadsheets and we will charge by the hour to do this.

I need to vent. WHAT AN INCREDIBLE WASTE OF MONEY? WHY DOES THE DOL WANT EVERY 401(k) PLAN CANCELLED AND REPLACED WITH A SEP OR SIMPLE??????

Giving them the benefit of the doubt, they either don't understand that there are some plans that operate this way, or they are obsessively concerned with this being some kind of loophole, or...I don't know. I wouldn't say it's an attack on 401(k)s but it certainly drives everyone to platforms so in a way it's an attack on small 401(k)s - for small plan to get similar options with a platform there would typically be a $2,000 or more minimum. And, for those of us running plans this way, it's a huge change that's being done at the last minute.

[Young Curmudgeon]

We recently had a seminar with the DOL and afterwards the agent said they "don't like these arrangements and want them to go away". FWIW, the DOL agent speaking had nothing constructive to offer as far as solutions. That said, can we not define a set of core options for which we provide information and lean on that for compliance? Activity outside of the core options wouldn't have to be covered?

[Bird]

We recently had a seminar with the DOL and afterwards the agent said they "don't like these arrangements and want them to go away".

Wow. That's what I've been telling clients they seemed to be saying but I didn't know they were actually thinking it.

FWIW, the DOL agent speaking had nothing constructive to offer as far as solutions. That said, can we not define a set of core options for which we provide information and lean on that for compliance? Activity outside of the core options wouldn't have to be covered?

Unless 5 participants chose the same fund, then you have to provide info on that fund as if it is a DIA.

[jpod]

Never mind the same fund, what if 5 or more participants buy the same stock? What if you have 25 different stocks held by 5 or more participants? It is a nightmare.

[Mike Preston]

But isn't there an exception for those that are considered financially sophisticated? Certainly a doctor who wants to make his or her own investments and wants to do so without his partners being aware of the investments has to meet that criteria.

[Bird]

But isn't there an exception for those that are considered financially sophisticated? Certainly a doctor who wants to make his or her own investments and wants to do so without his partners being aware of the investments has to meet that criteria.

There's a sentence in there -

Unless participants and beneficiaries are financially sophisticated, many of them may need guidance when choosing their own investments from among a large number of alternatives.

- but I consider it a throw-away line in terms of guidance. I believe their focus is on the "many of them...".

[Belgarath]

Interesting article. If Phyllis Borzi was quoted correctly in the final paragraph, it at least provides a ray of hope. But obviously comments at a meeting don't carry the weight of a written FAQ...

Conference Report: SPARK National Conference

Key Topic: Borzi addresses controversy over Question 30 of the disclosure FAQs.

Key Takeaway: Second disclosure FAQs out after July 1; fiduciaries should consider making some investment options in their brokerage window a designated investment alternative.

By Kristen Ricaurte Knebel

The Department of Labor is working on a second set of frequently-asked-questions and answers regarding its fee disclosure regime, but the industry should not expect it out before July 1, Phyllis C. Borzi, assistant secretary of labor for DOL's Employee Benefits Security Administration, said June 18 at the SPARK National Conference.

DOL issued its first set of FAQs on disclosures May 7, primarily addressing disclosures required under Section 404 of the Employee Retirement Income Security Act(88 PBD, 5/8/12; 39 BPR 921, 5/15/12). Borzi said that, since the release of the FAQs, there has been some “over-reading and overreacting” to Question 30, which deals with brokerage windows.

In the answer to Question 30, DOL “reiterate[ed] that this brokerage account, or brokerage window, is not a [designated investment alternative]. That's not groundbreaking,” Borzi said. Additionally, the answer reminded people of their fiduciary duty to “prudently select and monitor service providers. So once you choose a service provider, you can't just walk away,” she said.

While the answer may have reminded people of their fiduciary duty, Borzi recognized that the department has not been very clear as to fiduciaries' duties with regard to brokerage windows. Because of that, DOL has been speaking with retirement industry representatives about how they interpret their duty to participants when offering a brokerage window.

“People will come to us and say, 'Well, this was new. We had no idea that we had to monitor brokerage accounts.' I would say to them, 'Well, what did you think your fiduciary duty was: Set it and forget it?' ” Borzi said.

The Need to Monitor.

DOL recognized that asking a plan fiduciary offering a brokerage window to provide disclosures for every investment option in that brokerage window would not make much sense, Borzi said.

DOL was trying “to figure out how to get the kind of disclosure that people need to be able to make their [investment] choices in a way that wasn't overly burdensome for the plan sponsors and plan fiduciaries that offer participants these kinds of accounts,” she said.

Borzi said DOL gave people a safe harbor by saying that, “if you have either no DIAs or you have some DIAs in this brokerage account, you need to look at what people are actually selecting, because if the point of this is disclosure, then you have to give people some information about the fees and other forms of compensation that are associated with their choices.”

Borzi said the bottom line is that fiduciaries need to monitor the brokerage accounts and, if they see a majority of their participants selecting a particular investment, consider making some of the investment options a designated investment alternative.

“If, in this monitoring of what people are doing in the brokerage account, you see patterns begin to emerge, then you need to consider--consider being the operative word--whether or not it makes sense to designate some or all of the choices that people make, if a lot of them are choosing the same things, as a DIA. That is all we said,” Borzi told the audience.

By Kristen Ricaurte Knebel

[Bird]

Interesting article. If Phyllis Borzi was quoted correctly in the final paragraph, it at least provides a ray of hope. But obviously comments at a meeting don't carry the weight of a written FAQ...

This one? “If, in this monitoring of what people are doing in the brokerage account, you see patterns begin to emerge, then you need to consider--consider being the operative word--whether or not it makes sense to designate some or all of the choices that people make, if a lot of them are choosing the same things, as a DIA. That is all we said,” Borzi told the audience.

I'm not really sure why she would emphasize the word "consider" after being so emphatic about the need to monitor. In my vocabulary it means "think about it but don't necessarily do anything if nothing needs to be done" and the dictionary says:

Think carefully about (something), typically before making a decision: "each application is considered".

Think about and be drawn toward (a course of action).

I suspect she is aiming at the "think about it" part because of the prior passage: "'Additionally, the answer reminded people of their fiduciary duty to 'prudently select and monitor service providers.' So once you choose a service provider, you can't just walk away,' she said."

So no, I don't think it is a ray of hope.

And even though I hate that they are doing this at the last minute, I think they have a point. I have 10 or so clients who felt that if they just let everyone do almost anything they wanted, they had the least liability. And I gently said "no not really" but wasn't so worried about it. Now I have a virtual mandate to get them to make different arrangements that will be better for everyone involved anyway.

[shERPA]

I don't see much hope either. Consider a plan with 10 hospital based physicians, no other employees. Each physician is a 10% shareholder in the group, a board member, an HCE, and a plan trustee. Each has their own brokerage account.

Who is the employer who will "monitor" the plan investments? There is no one else except the 10 docs. And frequently, at least some of the docs don't want the other docs to know what they are doing with their investments.

[goldtpa]

I am having an argument with a colleague about the quarterly fee disclosure for brokerage accounts. She says nothing needs to be done as the statements already disclose the fee. I say that the sales charge needs to be disclosed and shown as a dollar per thousand. In addition a description of the fee also has to be given.

[Bird]

I am having an argument with a colleague about the quarterly fee disclosure for brokerage accounts. She says nothing needs to be done as the statements already disclose the fee. I say that the sales charge needs to be disclosed and shown as a dollar per thousand. In addition a description of the fee also has to be given.

I disagree with both of you, I think. Yes, after-the-fact disclosure of fees charged is required and if it shows up on the brokerage account that is good enough. But you don't have to disclose "sales charges" on mutual funds, in part because there are so many choices and options. But fees specific to the brokerage account, including commissions on individual securities (that's my interpretation), must be disclosed in advance, in some kind of a schedule (and that's where the brokers are proving unable or incompetent). So I guess if you meant commissions on regular brokerage account trades maybe I agree with you, but not about the dollar per thousand part.

Second, a plan administrator also must provide an explanation of any fees and expenses that may be charged against the individual account of a participant or beneficiary on an individual, rather than on a plan-wide, basis in connection with any such window, account, or arrangement. See 29 CFR § 2550.404a-5©(3)(i)(A). This would include: (1) any fee or expense necessary for the participant or beneficiary to start, open, or initially access such a window, account, or arrangement (such as enrollment, initiation, or start up fees), or to stop, close or terminate access; (2) any ongoing fee or expense (annual, monthly, or any other similarly charged fee or expense) necessary for the participant to maintain access to the window, account, or arrangement, including inactivity fees and minimum balance fees; and (3) any commissions or fees (e.g., per trade fee) charged in connection with the purchase or sale of a security, including front or back end sales loads if known; but would not include any fees or expenses of the investment selected by the participant or beneficiary (e.g., Rule 12b-1 or similar fees reflected in the investment's total annual operating expenses).

Wow, re-reading it it seems to call for a disclosure of mutual fund front- or back-end loads as well, but I don't think they meant it.

I have been struggling with advisory fees as a percentage of assets (posted in another thread) and am thinking that because they are not required to open or maintain the account, they are not subject to advance disclosure.

[commishvp]

What are other TPA's doing to report the quarterly fee disclosure on clients in SDBA's? So participant takes a $2,000 loan from plan, plus a $100 loan fee . . . statement shows $2,100 coming out of the plan but does not clearly explain the charges?

Same situation but on a distribution, brokerage account just shows total liquidated amount, no separate line item fee with clear explanation.

Looking for a practical solution?

Thanks,