Participant Directed Accounts; brokers want all kinds of indemnificati

[chris]

Profit sharing plan allows for participants to direct the investment of their account balances. In the past, participants have been selecting their own broker to handle their accounts. The trustees of the plan did not have much involvement with the set-up of the directed accounts. Recently, as other participants have elected to direct the investment of their own accounts, their brokers are requiring the plan trustees to sign off on a myriad of forms, including indemnification/hold harmless language, etc...... The trustees are somewhat squeamish about signing off on such documents especially given the way that the typical directed investment account works, e.g., participant calls up broker/advisor and says let's buy that condo in the Bahamas..... Is there a practical way to handle this other than the trustees' combing through each account agreement and telling the broker which language they will and will not accept and sign off on???

[mbozek]

The brokers are doing their best to limit their liability for any actions that result in losses to the participants accounts or violations of law. Where is counsel for the plan in reviewing these agreements to prevent such limitations? The obvious solution is for the plan fiduciary to have counsel prepare an agreement for all the brokers to sign which spells out their responsibilities and liabilities to the plan and the participants under ERISA. If a broker refuses to sign then the broker will be terminated as an option under the plan. Also there are some formalities that must be observed; for example under the 404© regs the trading instructions must be to be sent to the fids who then notify the brokers. I have represented financial providers and plan trustees in preparing these agreements and it is always a negotiated process. What amazes me is that there has been no involvement by counsel for the plan in advising the fids in this critical area of fiduciary liability. The plan fids could be liable to the participant for trading losses in the participant's account because of the participants instructions to the broker.

[chris]

Regarding your comment that

"The obvious solution is for the plan fiduciary to have counsel prepare an agreement for all the brokers to sign which spells out their responsibilities and liabilities to the plan and the participants under ERISA."

any idea where sample agreements may be available? Also, how practical is drafting such an agreement where the plan is b/t 30 and 50 e/ee's? I guess the answer to the last one is how much risk are the fiduciaries willing to stomach without such an agreement......

From my experience dealing with smaller employers, it seems that the participant directs the broker and the trustees are left out of the loop.

Also, regardless of whether or not the plan is implementing 404© the trustees would need to be a party to any such agreement to have any authority to deal with the account, e.g., preventing a participant from engaging in a prohibited transaction.....

[mbozek]

Since the trustees are the fids and the participants accounts are plan assets the trustees have control over all investment activity. The trustees are only out of the loop if they choose to be there. My question is still where is counsel on this issue. Even plans with 30-50 ee need to be properly advised. The problem is that small plans dont usually have competent ERISA counsel- The fids can limit their liability by retaining counsel to prepare the necessary agreement for the brokers to sign. These agreements are proprietary and result of hours of review and negotiation. Why would an attorney give one away- Besides each arrangement is different and must be drafted in accordance with the plan terms and the amount of risk the fids want to assume. The client cant just adopt an agreement prepared for another plan. Also the plan has to negotiate the terms of the agreements required by each brokerage. As a result there are usually two sets of agreements. The PT issues are dealt with by requiring that the trading instructions be sent to the fids and having the broker/part. hold the plan harmless for PT violations- Some brokers will balk at this provision. Plan fids who dont protect themselves from the participants and the brokers by drafting proper documents are putting themselves in danger of fid liability.

[four01kman]

I agree with mbozek. Where is the plan's attorney in all this. This is not the kind of issue where a fiduciary doesn't want to know what is going on.

The obvious fix in this situation may not be palatable. Limit the the number of brokers, or specifiy that a particular broker be used.

[Guest SCHAEFM2]

In a previous position, I encountered a very similar situation. I worked for a bank who provided investment, administration, and trustee services to clients. I had a client consisting of a group of physicians, each of whom had the ability to direct their own investments according to the document. They each had a different broker. For this particular client, we were custodian of the assets - not the trustee as was usual for us. In addition, we mandated that each physician sign a "hold harmless" agreement so that we could take written investment direction from the brokers. The Plan document again indicated that the participants would bear all responsibility for investments. Clients called their brokers to make trades, and we mirrored the transactions on our system. Any broker unwilling or unable to provide updates to us within 24 hours of a trade AND duplicate statements was not accepted. Once the ground rules were established, the system worked for about 35 physicians, and in general, most everyone received satisfactory marks for working and playing well together.

The minimal documentation survived audits by bank regulators, the IRS, and the DoL - although the DoL kept us guessing for a while.

Good luck!

[chris]

Mbozek.... You mentioned that there are two sets of agreements. One , of course, is the agreement b/t the plan trustees and the particular broker. What is the second agreement you referred to? Also, do you draft a participant directed account procedure for each plan? For example, the procedure may mandate that all directed accounts will be through broker x who also handles the assets of the general trust or the procedure may set an objective $$ amount at which a participant may direct the investment of his/her account...???

[mbozek]

There can be one contract between the plan admin, the trustee and broker laying out the the terms under which the plan admin expects compliance with applicable law. There may also be a separate agreement between the plan admin and the broker in which the broker dictates its terms to the plan admin. The reason there are two sets of documents is that the plan admin and broker each have a standard document which they want to use because of different legal requirements such as securities laws which apply to broker but not plan. (Eg. broker document will want representation that broker is not a fiduciary to the plan or participant and the plan fiduciaries are responsible for prudent investment under ERISA and conditions for accepting and dropping accounts of participant). There will also be issues regarding how the broker is treated under the agreement with plan admin. Brokers do not want the F word used regarding their relation to the participant-they prefer being the party who executes the instruction of the participant.