Participants w/ separate accounts at separate institutions

[Guest LWilson]

This client has six participants, all salesmen, located throughout the country. These fellas aren't happy with where their money is right now, and each has their own idea of a great place to transfer the plan funds.

The participants currently have individual accounts at Loser Institution, and this is a straightforward Profit Sharing Plan.

Because these salesmen can't come to an agreement on where to move the plan assets, they are wondering if they can each move their assets to their individually selected institutions . . .

As far as I can see, the only issue is providing each institution with whatever plan/document information they need . . . At the recordkeeping end of thing it doesn't change my life a bit.

So, are there any IRS/DOL rules for or against this kind of arrangement?

[RTK]

I do not know of any specific provisions off the top of the head. That does not mean there would not be any ERISA/IRC issues. A couple of ERISA issues that immediately come to mind:

1. Will the institutions be trustees? If so, who selects them as trustee? Typically plan sponsor has the duty. If not, what role will the current trustee play?

2. Who will be responsible for the investments? If the participants, will need to comply with 404 - otherwise, someone will have the investment responsibility.

3. Who will monitor the assets to ensure no violation of plan terms and ERISA duties?

4. Trust agreements and/or custodial agreements will be needed to document arrangement and responsibilities.

A primary IRC issue is whether the right of the participant to move assets to selected institutions is a nondiscriminatory brf.

[Guest LWilson]

Food for thought . . . thank you.

[Guest MaryMac]

I had a client with an arrangement where each participant could invest in any institution of choice, including multiple institutions for one participant.

Aside from the concerns mentioned above, the client who had this arrangement experienced considerable administrative burden in funding multiple accounts.

And when trustees or addresses changed, there was extra work in getting all accounts changed.

But, in the end it was worth it for this client to satisfy the very vocal sales reps.

[Guest LVanSteeter]

What about getting them all to agree on a company that might offer most of what they are looking for?

Can they go to a large company that offers Mutual Funds from many different companies (Fidelity, Vanguard, etc.)?

Since it is a PS plan, I believe that many of these have agreements to sell each others funds, some may even have an option to have self directed brokerage accounts.

Just another option!

[KJohnson]

RTK raises some good issues.

For more, search under the Message Boards or benefitslink for personal brokerage accounts or "PBAs"

Also there is a good short article in the Journal of Pension Benefits" that I received today regarding some of the administrative, prohibited transaction and other issues you can run into in allowing this feature.

[mbozek]

Why not offer either a directed brokerage account under 404©where each participant can select their own investments/ funds and hire their own advisor or make each fund that a participant wants to invest in an investment choice under the plan under 404©. All participants could invest in each fund.

KJ: according to the WSJ about 15% of all 401(k) plans offer directed brokerage accounts. The PT issues are manageable in public co and minimal in privately held co.

[KJohnson]

Clearly there is great pressure to add PBAs. In fact a Hewitt study of 290 plan sponsors in the U.S. with a combined total of approximately two million plan participants and $105 billion in assets showed that 55% were adding or considering adding PBAs.

http://was.hewitt.com/hewitt/resource/rpts...t_brokerage.htm

This doesn't mean it is for everyone. It is definitely not for an employer who is unwilling to hire someone to perform the increased accounting burden.

You may want to look here regarding 404© protection and PBAs.

http://www.benefitslink.com/reish/articles...08.99.404c.html

You may want to look here to see an article on the general prudence of offering PBAs.

http://www.reish.com/publications/article_...m?ARTICLEID=281

The brokerage accounts need to be titled correctly (in the name of the trust) you need to make sure that contribution go into the right accounts (and does not end up in a participant's "non-plan" account with the broker.) The participant cannot have direct access to the account for purposes of receiving a distribution. There are potential issues if the broker "combines" any PBA and non-plan account for purposes of price-breaks on commissions or charges on non-plan assets.

Most importantly someone needs to reconcile all of the brokerage statements.

In the small employer context you need to find someone to "step up to the plate" for recordkeeping purposes and to reconcile data from all of the brokers. Where I have seen this work best is to coordinate the brokerage option through a single broker so you know where to look for records of transactions. Of course this takes away some of the attractiveness of the brokerage option.

PBAs may be right for your situation but just realize what you are getting into. Talk to your TPA or recorkeeper about this and any increased fees that may be involved.

[mbozek]

The plan could minimize admin problems by offering a directed brokerage acct through one broker: Schwab comes to mind -- they do this all the time and have the paperwork down pretty good. Each participant could invest in whatever investment media they chose- most fund families are available through Schwab as well as individual stock and bonds. I dont know what the cost is but should be charged back to the participants who elect this option the same as commissions. I have advised several clients on adding a directed brokerage acct to a DC plan and no one has ever had problems with the accounting issues. Please advise of the accounting problems. If you hire a competent firm to act as the broker then the problems you you cite should not occur.

[KJohnson]

As I mentioned in my prior post, I think "forcing" participants to go through one broker who knows what he is doing is a good start. However, what brokers are are generally good at is what they are paid for-- advising individuals on stocks. The "niceties" of account administration is not usually their forte. Even some of the best brokers are not aware that the trust has a separate EIN, that the plan's trustee should be the account holder etc.

This is compounded when, as the title of this thread suggests, the participants want to use separate institutions. I have seen situations where the ability to completely self-direct does not seem to be as important to participants as the ability to use their own broker. Oviously the brokers want these assets to generate commissions. I frankly have seen this lead to a recordkeeping nightmare Some brokers may report electornically and others through paper. Those that report electronically may use different formats. In such a situation you need a competent recordkeeper/tpa to "ride heard" on making sure that everything is reported and titled accurately.

Then, of course, if you go through an integrated or bundled service provider, you have the age old issue of those that the provider might be good at investments are not good at administration or vice versa. Here is a good article on that issue:

http://www.benefitslink.com/articles/selecting.shtml

Keeping employees/participants happy with their plan is very important and offering personal brokerage accounts can make participants happy (until they lose all of their accounts when they realize they are not stock geniuses) However I think the decision is one that needs a good deal of thought and study by the plan sponsor before it is implemented.

[Guest deathbycashcall]

Any TPA that is willing to take our nightmare cases of "individually directed accounts at the participant's whim", please stand! We will gladly give you ours! And we will never take another one! Too many parties involved, too many incompetent clerks at the brokerage houses, no one "minding the store" results in a huge mess, prohibited transactions, disqualifying events, and that's if you can track down the data at year end!

[Guest LVanSteeter]

I would strongly recommend that you look at one of the big firms.

I know that Fidelity has a self directed option for qualified plans, including signature ready 5500 services. I know that several other large firms have the same.

I have no clue what this would cost, but it might be worth it if the plans are that big of a headache.

Good Luck!