Brokerage accounts (again)

[Bird]

I'm not sure if this is a rant or a question...let's see where it goes.

I have a number ("too many") of clients who use managed brokerage accounts in self-directed plans - that is, they hire an investment manager, or otherwise charge an asset-based fee, for managing money. This is a separate charge that shows up as a deduction on the participant statements.

I've tried, pretty much unsuccessfully, to bail out on the disclosure - I spit out a basic notice from Ft. William and say "your broker should provide a separate schedule of fees" and ask the broker to provide a fee schedule. (Chuckling now at my own naivete that this could possibly work...)

Of course, the brokers proudly send me their 408b2 disclosure. I say "no, no, that's not it, I want you to tell them what they will pay in their account." So they send me something that tells what the fees were last year. I say "no, no, that's not it, I want you to tell them what they will pay in their account - you know, a $100 fee or whatever, and the percentage for management." Then more long and agonizing discussions follow, and (usually), they eventually send me a 111 page mess that might or might not contain what we want, but no way am I wading through it to pull out a fee schedule. We're at an impasse right now on most of these. (I suppose my barely concealed contempt for them is affecting my relationships.)

Anyway...now I have a Merrill (why is it always them...) guy telling me that his home office "expert" says they really don't have to provide a schedule of management fees. Mmm. I guess that's the question...could you consider a managed account an "option" that doesn't require advance disclosure of the management fees? They are being deducted at the brokerage level, so it's not like a mutual fund with an expense ratio. I pasted most of Q&A 13 below; it doesn't discuss such fees directly but in my mind that doesn't mean they shouldn't be there. It doesn't make sense to me that they would have to disclose commissions on trades but not an overall management fee. Thoughts?

Q-13: What information must be disclosed under paragraph © of the regulation about “brokerage windows,” “self-directed brokerage accounts,” and other similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan?

A-13: First, a plan administrator must provide a general description of any such window, account, or arrangement. See 29 CFR § 2550.404a-5©(1)(i)(F). The regulation does not state how specific and detailed a description must be to satisfy this requirement. Whether a particular description is satisfactory will depend on the facts and circumstances of the specific plan and the specific window, account, or arrangement. At a minimum, however, this description must provide sufficient information to enable participants and beneficiaries to understand how the window, account, or arrangement works (e.g., how and to whom to give investment instructions; account balance requirements, if any; restrictions or limitations on trading, if any; how the window, account, or arrangement differs from the plan’s designated investment alternatives) and whom to contact with questions.

Second, a plan administrator also must provide an explanation of

any fees and expenses that may be charged against the individual account

of a participant or beneficiary on an individual, rather than on a plan-wide, basis in connection with any such window, account, or arrangement. See 29 CFR § 2550.404a-5©(3)(i)(A). This would include: (1) any fee or expense necessary for the participant or beneficiary to start, open, or initially access such a window, account, or arrangement (such as enrollment, initiation, or start up fees), or to stop, close or terminate access; (2) any ongoing fee or expense (annual, monthly, or any other similarly charged fee or expense) necessary for the participant to maintain access to the window, account, or arrangement, including inactivity fees and minimum balance fees; and (3) any commissions or fees (e.g., per trade fee) charged in connection with the purchase or sale of a security, including front or back end sales loads if known; but would not include any fees or expenses of the investment selected by the participant or beneficiary (e.g., Rule 12b-1 or similar fees reflected in the investment’s total annual operating expenses). The Department understands that in some circumstances the specific amount of certain fees associated with the purchase or sale of a security through a window, account, or arrangement, such as front end sales loads for open-end management investment companies registered under the Investment Company Act of 1940, may vary across investments available through the window or may not be known by the plan administrator or provider of the window, account, or arrangement in advance of the purchase or sale of the security by a participant or beneficiary. In recognition of the foregoing, a general statement that such fees exist and that they may be charged against the individual account of a purchasing or selling participant or beneficiary, and directions as to how the participant can obtain information about such fees in connection with any particular investment, ordinarily will satisfy the requirements of paragraph ©(3)(i)(A) of the regulation. Otherwise, plan administrators might inundate participants and beneficiaries with information about the cost of buying or selling all the various securities available through a window, account, or arrangement, despite the fact that participants and beneficiaries may not have the interest or expertise to purchase or sell each or any such security. Further, the statement should advise participants and beneficiaries to ask the provider of the window, account, or arrangement about any fees, including any undisclosed fees, associated with the purchase or sale of a particular security through a window, account, or arrangement, before purchasing or selling such security.

[K2retire]

I'm anxious to hear what others have to say. I've run into pretty much the same thing -- including being specifically told that management fees don't have to be disclosed.

[Bird]

I'm starting to think management fees do not have to be disclosed, at least not in the annual notice. That is, at least in theory, an option, just like buying any mutual fund is an option. It's not "necessary" to open or maintain the account, so it hinges on #3:

(3) any commissions or fees (e.g., per trade fee) charged in connection with the purchase or sale of a security, including front or back end sales loads if known; but would not include any fees or expenses of the investment selected by the participant or beneficiary (e.g., Rule 12b-1 or similar fees reflected in the investment’s total annual operating expenses).

Now I'm back to thinking it does have to be disclosed as being "in connection with the purchase or sale of a security", at least somewhat akin to that. I really don't know.

Hope to hear from others on this.