self direcected 401k plan

[Gary]

This has been a bit of a pet peeve for me.

I generally work with clients that have about 10 employees (when they have employees).

They frequently implement a safe harbor (3% non elective) 401k profit sharing plan.

If the plan sponsor wants to invest than the employees are not relevant and the company invests how they choose and pays out benefits upon termination. Not a problem, though few plan sponsors choose this route as they typically want some or all of the investments self directed.

With that said they look to me for guidance on the set up.

My understanding is that there are many rules to adhere to for the plan to have 404c protection and perhaps not a necessary feature.

So where do I direct them for self directed plan?

1) One idea I have is to have them set up individual sub accounts with Schwab where each participant invests in his own brokerage account in whatever he wants.

2) Another method I believe is to have the sponsor work with a broker at some financial institution where they establish a menu of reasonable and prudent investment options for each participant and they each have access on line to their own account.

The clients I have just want something simple to work with and understand. I don't have to suggest anything complex and extremely custom made. Just something to get them started.

So in conclusion based on the two methods I mention above and my goals, does anyone have suggestions on how to implement what I am trying to do? The more specific re: procedures the better.

I want to establish a comfotable procedure for implementing these plans.

Thanks.

[Bird]

Gary, it sounds like we're in similar markets. There's a lot to talk about, and feel free to send me a PM if you want to call or discuss further by e-mail. Here are a couple of thoughts, pretty much just cutting to the chase...

we prefer, in fact we pretty much insist, on using a platform designed for 401(k) plans when we set up a new plan. I've done the thing with individual retail brokerage or mutual fund accounts for each participant, but when you've seen the light of working with companies that are geared to this market, even a two or three person plan works far better on a platform. We primarily use American Funds, and sometimes John Hancock; there are others in the market but we can only work with so many providers. At the end of the year, we just suck out the investment information from their systems and import it into our own system.

(As an aside, one of the benefits of working with a platform is that they handle distribution processing - cutting checks, withholding, and 1099-Rs. It's a big advantage that isn't always considered. Trying to pay someone the right amount from a Schwab account when you have vesting and withholding - yuck.)

BTW, some mutual funds are refusing to establish FBO accounts (i.e. retail, non-platform) for 401(k) plans.

You do have to work with a broker (I am a broker and sometimes act as the TPA only, more and more as both the TPA and broker, which is a big advantage). There are pros and cons to this; on the plus side you have someone to work with the participants and at least try to explain some investing concepts; on the negative side, well, they are brokers and brokers tend to get in the way and mess things up.

I'll let it go at that; I don't know how well I conveyed it but there are tremendous benefits to running plans this way.

[Bill Presson]

Bird, that was actually quite good.