Self-directed Brokerage Option

[Guest Hunter]

We have had inquiries from our participants on adding a self-directed brokerage option to our menu of mutual funds in our 401(k) program. Does anyone have names of companies which offer this feature in their program/product, and also any experiences they can share with us.

[MWeddell]

Charles Schwab and State Street Global Advisors have the longest track record with a self-directed account. JP Morgan / American Century is the only provider I've heard of who doesn't charge extra for the self-directed option. Most major 401(k) providers have added the feature during the past 2 years, although most of them limit participants to only investing a portion of their account in the self-directed option.

[Jon Chambers]

Many providers offer self directed accounts, using numerous types of delivery. I would add Merrill Lynch and Fidelity as two large players that offer a proprietary brokerage feature, and United Missouri Bank and North American Trust Company as providers that will permit non-proprietary brokerage. If you are considering this, there are a host of issues to consider. I wrote a paper on the topic--Dave has posted a couple of my other papers on Benefitslink, maybe he might add this one.

I know this may sound self-serving, but I'd suggest discussing the concept in detail with a plan consultant and/or ERISA attorney before proceeding. Self directed accounts can work well, but can also snake bite you if you aren't careful

[KIP KRAUS]

By self-directed I assume we are talking about selecting investment options outside the normal ones offered by the plan? If so, it sounds like a record keeping nightmare to me. I'd want to know how record keeping is coordinated and what the extra cost is.

[Dawn Hafner]

In my experience the recordkeeping is generally handled through a TPA, especially if the participants wish to open brokerage accounts at different brokerage houses.

I find these investment arrangements common in attorney and doctor groups where they want to open up various accounts. The key is to ensure that the TPA is set up on duplicate mailer for all accounts. When the statements are received we generally would set up one recordkeeping account for each account open, but not each individual investment within that account. There are usually extra charges for this arrangement based on the number of segregated accounts.

This investment option should be available to each participant to avoid any discrimination issues. We find though that many participants will opt not to use this feature as they are uncomfortable with this level of decision making. So, the plan will still maintain a diversified menu of fund options for those participants.

[Guest Paul Hinderegger]

I work for a brokerage firm and we have seen a tremendous increase in the number of plans that offer a self-directed brokerage account in their plan. In fact, about 30% of our new bundled 401(k) plans want this option in their plans.

There are numerous issues to consider before adding a self directed account such as:

1) Are the participants sophisticated enough for this type of choice? However, it could be discriminatory if you offer it only to a select group.

2) Does the plan sponsor still receive 404© protection for the self-directed accounts?

3) How will the VRU and WEB be updated to reflecte the daily change in market value of the investments in the self directed account?

4) Will the participant receive 2 sets of quarterly benefit statements or 1?

5) How will weekly/monthly contributions be wired to the self directed accounts?

6) How will you get the necessary informaton to do the 5500 if participants are invested in so many asset categories (ie- stocks, bonds, options, mutual funds, etc.)?

7) What are the fees/costs involved? Is the plan sponsor charged an additional fee for offering this option? What are the participant's commissions for trading in the self-directed account?

8) How do participants initiate trades within the the self directed account? Can they trade via the Web?

Although self directed brokerage accounts are somewhat new, as technology and the desire to expand the number of investment options increase, self directed brokerage accounts will probably become as commonplace as daily valuation.

[This message has been edited by Paul Hinderegger (edited 11-05-98).]

[k man]

I recall an article on benefits link on this topic. does anyone have a copy or have the link to the article.

[Guest advisorpage]

Originally posted by Hunter

We have had inquiries from our participants on adding a self-directed brokerage option to our menu of mutual funds in our 401(k) program. Does anyone have names of companies which offer this feature in their program/product, and also any experiences they can share with us.

Depends entirely on the size of your company but I would caution anyone investigating the *brand name* companies...often they have a conflict in interest. Reason is, they usually manage mutual funds, as well as offer to actively manage your 401k assets if requested (which will usually be invested in their own funds ect.)

See...in the real world only the employee (and sometimes the employer) is truely concerned about the performance of a retirement vehicle. This is a conclusion from one of my favorite games called 'follow the money'. The theory supports your investigation of self-directed options.

If you represent a small company I have run across an internet-based 401k platform in San Francisco (but I forget the name) that allows for a limited fund selection, but employees and employers have total web-access to their 401k. Cost is extremely low also, they work with about 150 small business (less than 100 employees) I also know of 3 investment advisors that work with 401ks and 403bs, but they are on the other end of the scale...charging management fees.

I know of one fellow that wants to educate investors to teach them how to invest their 401k assets...but he is chinese american and is sometimes hard to understand if you are not used to his way of speech.

(I just noticed I am not entirely too helpful here...lol)

feel free to get in touch with me and I will send you those contacts.

[Guest LVanSteeter]

Disclaimer: I work for one of the large, brand name companies mentioned, in the tax deferred plan area, specifically in the tax reporting area.

Self Directed Brokerage (SDB) can be offered by many companies and usually allows participants to purchase individual stocks, bonds and other companies Mutual Funds.

As for recordkeeping, etc. (depending upon the agreement with the company, which may require that the company be the exclusive provider for the plan) you might even get set up for the 5500 forms to be provided on a signature ready basis.

You might want to contact several companies and get some cost comparisons along with detailed information about services provided.

[k man]

I recall an article on benefits link on the topic of SDBA's as a right benefit and feature which must separately pass 1.401(a)-4. Does anyone have a copy or have the link to the article.

[Guest dmj1998]

here's my two cents on this topic:

like the earlier posts have mentioned, recordkeeping these accounts can be quite an adventure. if you are a small employer (like under 100 EE's), than just about anyone can handle this type of account - but do they want to and can it be mutually beneficial (read=profitable to the provider)? as your company increases in size, the "brand name" providers become more attractive because they are better suited to handling these type of accounts. most of the ones i've seen actually leverage their existing retail brokerage operations with a couple of plan restrictions built on top. this means separate points of entry for participant trading and info, but usually monthly brokerage statements. Hinderegger brings up alot of points that need to be considered, and there are always a few more (like beneficiary, qdro, and other admin issues - it might look good on paper, but how is it processed?).

i've also seen charles schwab take on these accounts for existing plans that they do not currently recordkeep (if you employer is large enough - outsourced from an outsourcer), so that minimizes the conflict of interest argument (what provider in this industry isn't conflicted?)

one issue that i haven't seen addressed is the per participant fee that most providers charge. other message board chains have discussed the appropriateness of "charging" for a benefit. since most of these providers have low or no cost ira's on the retail side, i would push very for the same within the plan (you are giving them a direct line into steady cash flows)

[Demosthenes]

Check Persumma out of Boston, MA. It's a JV between an insurance company and an e 401k start up, been around about a year? Ted Benna is involved, I think he sits on the board. The product is 100% brokerage window.

State Street is pricey. Schwab's costs are reasonable, but they want to do the servicing and run all of the assets. They don't play well with others, so incorporating them into an exisiting program as a new option/offering is going to be tough.

New player is T D Waterhouse, they've been making strides but I'm not sure how much is real and how much is still vaporware.

Most of the discount brokers eTrade, Brown etc have some type of offering as well as most of the full blown wirehouses.

[KJohnson]

kman

Here is a link that discusses the 401(a)(4) issue, I am not sure whether the IRS has commented on this in subsequent ASPA conferences.

http://benefitslink.com/boards/index.php?showtopic=7700

[k man]

I thought I recalled an article written by some authority on the subject

[Guest halka]

We serve as trustee and/or TPA of numerous 401Ks with an SDO (self-directed option) feature. Some of those flow through a single designated broker firm, others allow participants to pick any broker (who can meet operational requirements). Insofar as the SDO must be offered indiscriminately to ALL participants, there are concerns about some participants' investment abilities. That's why all SDO plans also offer a menu of core investment options (mutual funds) for participants who do not want an SDO. (It's also a reason to place a separate fee on SDOs.) Participants may concurrently have assets in both SDO and Core options and may move cash among the options daily (subject to cash availability). There are many operational challenges... getting broker info quickly enough to update VRU and WEB systems; navigating 3-day SDO settlements w/ 1-day Core settlement; calculating and funding participant loans; producing consolidated statements; shareholder communications, etc etc. But, the biggest problem seems related to the greed factor -- on the part of some (not all) brokers and some (not all) participants. Participants want to invest in illiquid and/or unpriceable partnerships or private equity deals or commodity contracts; brokers want to sell loaded mutual funds or partnership deals. Setting and enforcing realistic limits on permissible SDO investments is critical to making these plans function smoothly.

[Jon Chambers]

Readers of this thread might be interested in an article I wrote a couple of years back on this topic. It's more focused on fiduciary issues, and complexities related to multi-broker IDAs not structured as a DVP arrangement. Here's the link for anyone that's interested.

http://www.advisorsquare.com/advisors/schu...ns/82713135.pdf