Participant Directed Brokerage or "supermarket" accounts in

[Guest Kerry]

I'm interested in learing more about this feature of a plan, the pros and cons. We're considering whether this option is viable and would like to know other's experiences.

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[Guest Carol Ringwald]

There are several issues to consider with offering a self-directed brokerage account option. First, it's best to choose only one broker/dealer firm's self-directed option (such as Schwab, SmithBarney, etc.). Having more than one option will become a headache from an admin. point of view. Second, the biggest challenge with the self-directed accounts is doing the plan reporting for the assets since the particpants can virtually choose any investment. You would need to collect all the data and put together the financial data for the reports...not necessarily an easy task. This would be a big pain for even a small plan...more than 10-20 participants because they can each choose what they want. Third, this requires lots of education for the participants so they know what they are getting into. Last, the plus side is that all the transfer transactions are handled by the brokerage firm so you don't need to have a voice system or internet access available in your shop. Be happy to discuss further: carol@shawmutconsulting.com

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Carol J. Ringwald

[imchipbrown]

Agree with Carol, especially from the administrative point. I run 10 or so plans this way. With 20 participants, twelve months of statements means inputing 240 months of data. Imagine the December statements of a participant with 6 mutual funds. Each will fund usually throws off a ST Gain, LT gain and Div for reinvestment. Plus monthly contribution, maybe match, interest from money market... lot's of input.

Enough gripes. The real plus is the freedom to choose from the vast array of mutual funds and individual stocks. No fund company has all the best funds in all catagories.

The real minus. Until a participant defers a significant amount of money, he can't buy anything. Mutual funds have minimum initial investments of $500 - $5000. Stocks can be bought, but the commission puts you in a decent hole from the start. That leaves the Money Market account... fairly dismal right now (<5%).

A profit-sharing contribution can help, as can matching.

[Dawn Hafner]

Agree with Carol & Chip. I would also add though that these arrangements often intimidate those employees less experienced with investing. Although this appeals to many attorney and doctor groups, their staff may be overwhelmed. The staff may actually prefer to just choose their investments from a fund menu that is made available. Of course to avoid any nondiscrimination issues the brokerage option must be offered to them, but the fund menu will usually be a more comfortable choice for them at least initially. This can also cut down on the administrative cost since the number of brokerage accounts will be smaller. The other key to this arrangement is to get all participants trained that the MUST get the trustee or TPA set up on duplicate mailers for statements. Much time is spent waiting to collect all statements especially as participants have opened new accounts during the year & failed to mention that to anyone.