Self Directed plan investments

[Gary]

We have a client who set up a 401k profit sharing plan.

They have about 25 participants.

They asked that we assist with establishment of accounts at Schwab.

They want each participant to complete an application to establish their own self directed account.

The money will likely start in the participant's money market type account and then be available for each of them to invest as they choose (i.e. no menu of investment options) and access on-line just as if they had their own savings account with Schwab.

Is this a permissible type of self directed arrangement?

Thank you.

[austin3515]

Sure it's permissible... Defintiely not the best thing from a fiduciary perspective, to invest in the money market as the default. But for a small start-up plan, there's probably not a lot of exposure there. Plus, if you went to a more robust platform, you'd be paying much higher investment expenses for a platform.

Just definitely be wary of people who leave there money in the money market fund and never invest it. Probably makes sense to get them to sign some sort of a form that says "I understand that my accounts will be invested in the money market until I give Schwab directions" to protect against the liability.

[Gary]

Can such an investment platform described in my opening post be the basis for 404© protection? If not what are some of the practical deficiencies? The money market default investment may be one.

Thanks.

[Bird]

If not what are some of the practical deficiencies? The money market default investment may be one.

I think that's a QDIA problem, not 404©...for 404© you have all of the explanations - that the plan is intended to be 404© compliant, descriptions of the investment alternatives, descriptions of fees, etc. Some of that may be in the SPD or other materials, or may not. I'd say that in general it's going to be difficult to be compliant without some sort of a package, either a comprehensive platform or additional materials specifically designed for 404© compliance. The trustee may decide that the hassle of trying to be compliant is not worth the teeny-tiny risk of one of those 25 participants suing it for giving him or herself enough rope to hang.

And, if you don't have some sort of comprehensive reporting, you might wonder if it's a great idea to have 25 separate Schwab accounts...depending on what they buy, and if you actually reconcile the accounts, that one plan can almost turn into a (low-paying) career.

[Gary]

Bird

Thank you for your response.

Regarding plan admin:

As you say if there are 25 (actually a bilt less) accounts it can be tedious re: record keeping. The record keeping challenge I see is to determine which portion is profit sharing and subject to vesting and which portion is 401k and 100% vested. Based on weighted averages it doesn't seem too difficult, but still adds work.

Is my summary re: admin above in line with what you were referring to? And do you have other suggestions? Perhaps another brokerage firm can handle providing allocations between vested and non vested portions. Of course the brokerage firm (eg. Schwab) is only used as a custodian of assets and not to draft and admin the plan and not for non discrim testing and 5500s etc.

Thanks

[Bird]

Is my summary re: admin above in line with what you were referring to?

Yes and no...yes it is tedious to manually reconcile the statements, if that is indeed what will have to be done. But the tracking by source/vesting isn't so bad; we let our admin system allocate the total gain across sources once per year...although it does present an additional hassle at the moment of payout with a moving target.

We try to steer any plan with more than a handful of participants to a true platform - American Funds, John Hancock, etc. - where they recordkeep by source, and we can get electronic downloads of account information (and they process distributions). We still have some holdovers, including one almost this size at Schwab, and while I guess we make a profit on it, I don't know that it's worth all the time that could be spent somewhere else.

[Gary]

Bird,

When you say "by source" I assume you mean profit sharing, 401k safe harbor, 401k and so forth.

When you reference Hancock and American Funds as a "true platform" I take that to mean a level of sophistcation where the accounts are reported by source and they provide a portfolio of investment options; as compared to Schwab who just sets up an account and lets the participant invest in whatever they want.

Assuming my above understanding is correct then if I want to implement a true platform situation would I just contact a retirement plan representative at say Hancock and explain that I want accounts divided by source, with on-line access for participants, and a menu of investment options?

Other than Hancock and American Funds what other companies provide a platform? Fidelity? Schwab if a sponsor is willing to incur the higher fees?

Thanks much.

[Bird]

Yeah, I think you pretty much understand what I'm trying to explain. Most platforms, at least for smaller plans, are done through investment companies or insurance companies and need a broker. If you're not a broker, and you want to use a platform that requires a broker, then of course you have to find one (you could go to the investment company and ask them to recommend one). All kinds of warnings should be going off right now, because if you aren't interacting with brokers regularly now, you'll find that they have a tendency to f..er, mess things up, and increase costs. That's a longer discussion. (For the record, I am a broker, but as a group, they really bother me.)

If you want to try a no-load company (i.e. no broker) you might try T. Rowe Price. I briefly looked at something they were offering a couple of years ago, and it seemed like it might work, although at the end of the day, their no-load product had some extra charges built in and was costlier than the American Funds alternative. I don't know of others.

Some of this depends on your office model, admin system, etc. so what's right for me could be dead wrong for you.

If you want to talk further, send me a private message and we can talk by phone or e-mail.