404(c) and brokerage accounts

[AlbanyConsultant]

I've read through the 404(c ) checklists and commentaries from Fred Reish, David Pratt, and several others, and it seems like saying you intend to comply with 404(c ) (on the 5500) and actually jumping through all the hoops to do it are two separate things entirely.

That being said, can you even make a claim to be attempting to be 404(c ) compliant if all participants have individual brokerage accounts? The participants can invest in anything they choose, so I would think that there is no way the Trustee can provide education and information on everything available. Unless then this responsibility it assumed to be covered by the broker, but I don't know if that is OK. Thanks.

[MWeddell]

The 404(c ) regulations use the term "designated" funds. My argument, although I've not seen DOL guidance to confirm whether it works or not, is that a self-directed brokerage account that invests in any publicly-traded security that can administratively be handled by the provider is a nondesignated fund and therefore no ERISA 404(c ) disclosures on those funds is required.

[AlbanyConsultant]

I think I may have found the answer, where else but in Sal Tripodi's book.

From the 2005 ERISA Outline Book, Chapter 13, Section VI, Part E.1:

1.a.1) Required disclosures. Mandatory disclosures include: ... (2) a description of investment options,... (7) the most recent prospectus provided to the plan for an investment option which is subject to the Securities Act of 1933,.... The disclosures described in (6), (7) and (9) are not required until immediately after the participant makes his or her initial investment in that particular investment option. However, the prospectus described in (7) may be provided prior to the participant's actual investment in that option.

<emphasis mine>

So the prospectus can be provided after the participant buys into an investment, which happens fairly automatically in my experience. I'm willing to interpret (2) as saying that the participant has to be made aware that they are able to use a brokerage account as an investment option, as opposed to a description of every stock, bond, fund, etc. That's how I'd also respond to your "designated fund" issue, MWeddell, although I admit that I've not seen anything concrete on that, either.

So unless anyone can point out a real flaw in this reasoning, I'm willing to call this settled. Anyone?

[MWeddell]

It's been awhile since I've considered this issue, but aren't there various other disclosures that have to be provided in advance that can't be done if one considers the brokerage account to be a designated investment for which one is trying to get 404(c ) relief?

[Erik Read]

That address's one point of the many involved with 404(c ) compliance - the notices. There are SIGNIFICANT issues (in my opinion, and after hearing Fred's discussions on the topic a few times now) with an individual brokerage account, and the level of education that must be provided.

I stand by the belief that if the DOL want's to make you a Fiduciary for some reason - they will, regardless of how many hoops, and how big the hoops are that you've jumped through, that said, you really have to weigh if STATEING that the plan is 404(c ) compliant is what you want to do - and subject the policies to that level of scrutiny - I'm feeling a catch22 come on....

PS - when using the (c ) be sure to space it until the fix is done otherwise you get ©