Participant Directed Brokerage Accounts

[Guest lforesz]

We are having a slight disagreement as to what exactly the IRS means by Particpant directed brokerage accounts.

Does that mean an individually directed account feature where the participant can invest in any assets but all assets are held with the Trustee, or does this specifically mean brokerage accounts that are held by outside brokers?

I have left a message with the help desk but thought I would check and see if anyone had already answered the question.

Thanks

[BeckyMiller]

lforesz - remember, the Form 5500 series of reports now originates with the DOL, so that is the place to go for guidance on most of this stuff. In this case, you should look to a letter from the PWBA Office of Regulations and Interpretations on December 12, 2001 to Mr. Stephen M. Saxon of the Groom Law Group relating to the Schwab PCRA that letter states:

"The accounts, commonly referred to as "brokerage windows," allow participants the opportunity to purchase stocks, bonds,

mutual funds or other investments that are not offered as part of the plan's main investment alternatives. The brokerage account provider typically performs recordkeeping for assets in the accounts."

So - I think that is a good working definition of this concept.

[mbozek]

I dont understand how plan assets can be "held" by outside brokers since all plan assets must be held in trust. The brokers are required to excecute the trades for a participant who has a directed brokerage account because only someone with a series 7 license or other appropriate license can execute trades for a customer. The assets of the participant are still assets held in the name of the trustee and technically the trades are made by the trustee on behalf of the participant although the trustee is not acting as a fiduciary. The brokers do not hold the assets in the "street name" of the brokerage outside of the plan. A participant may maintain a separate account outside of the plan with a brokerage, e.g., for an IRA but this is not a plan asset.

[Earl]

you can set up individual accounts at Schwab but restrict what can be purchased, only mutual funds for example.

is that something other than an Particpant directed brokerage account?

[mbozek]

Self directed brokerage account is just another name for permitting participants to trade on investments which are not offerred as part of the regular investment choices under the plan, eg., plan can offer 10 mutual funds and a directed brokerage account. Under ERISA 404© regs, specific investments in directed brokerage accounts can be restricted by employer to prevent violations of prohibited transactions/ IRC requirements, (e.g., no leveraged investments) or invesments in non publicly held securities.

[Demosthenes]

Note that few brokerages actually have the ability to automatically monitor and refuse trades that do not meet the specifications set by the plan sponsor. The Trustee remains responsible for the types of trades executed regardless of the actual custody or trade execution.

Also, some brokerage houses (Schwab and State Street among them) will produce an addendum that combines all of the trades by participants of a plan into a quasi trust transaction report for incorporation into the Trsut reporting and 5500.

This arrangement does carry a fee and it should be set up beforehand so that the brokerage can arrange to link the related accounts.

[Guest LVanSteeter]

Fidelity also has the capability mentioned for Schwab.