Self-directed brokerage accounts

[Guest YATPA]

Assume a 401(k) profit sharing plan has all plan assets in a "daily" or allocated type of investment arrangement using an offering of mutual funds. The plan wants to offer separate money-managed accounts or self-directed brokerage accounts to participants with account balances of, say, $100,000 or more. The plan's HCEs would be the participants most likely to satisfy this requirement. Is this a problem? Does it create a benefits, rights and features problem? If so, is there another way to provide for an option like this?

[KJohnson]

The plan wants to offer separate money-managed accounts or self-directed brokerage accounts to participants with account balances of, say, $100,000 or more

If the Plan is setting the limit then it is a BRF and must be tested. The IRS has informally stated at an ASPA conference that if the account balance "floor" is set by a brokerage firm or an outside money manager there probably would not be a BRF issue.

Frankly I don't understand the IRS's reasoning. Its either a BRF or its not and its either discrminatorily available or its not. It seems that this could be easily manipulated. What if an insurance company selected by a Plan to provide annuities only wanted to write those annuities for balances of over $50,000. Do you think that you could offer an annuity distribution option on this basis without testing the BRF because it was a condition imposed by the insurance company rather than the Plan sponsor? (admittedly there may be some distinction between BRF's and optional forms of benefits).

[MWeddell]

Looking just at Reg. 1.401(a)(4)-4 and ignoring IRS officials' unofficial comments, I believe that this is a benefit, right, or feature that requires testing. The fact that the restriction might be imposed by a provider doesn't prevent it from being a BRF in my opinion.

I believe we've addressed this issue before in prior threads. You may try a search.

[mbozek]

The BRF regs refer to terms and conditions provided under the plan. Some brokerage house set minimums that they will accept for individual accounts because smaller accounts are too expensive to set up and administer and this is not a term set by the employer under the plan. The practical problem is that the plan may be able to make the directed brokerage option available to participants with balances less than 100k but only at a higher price for trades, admin, etc. If there is a cost /benefit trade off is using a broker that sets a floor on directed brokerage accounts inherently discriminatory? Would a two tier pricing structure for accounts, eg., over/under 100k be a nondiscriminatory BRF because it makes directed brokerage available to all participants?