Is the DoL ok with self-directed brokerage accounts?

[BG5150]

I read in a Relius Technical Update (from October '12) that the DoL might not be so crazy with self-directed brokerage accounts, especially if there is a near-limitless investment universe.

The piece has phrases as "The DOL could contend..." or "the DOL may argue..." Relius's point being that if you have all these investment opportunities, it may be too much, and the plan sponsor might not be able to furnish ample and appropriate investment information.

Is there any DOL correspondence stating the DOL position on brokerage accounts? I read FAB 2012-02R and it has stuff like fiduciary responsibility still applies with regards fees and services. But nothing about the concerns made in the Tech Update.

I didn't see an ASAP with anything similar, either.

Your thoughts are appreciated.

[masteff]

This might shed some light: http://www.buckconsultants.com/portals/0/publications/fyi/2012/fyi-2012-0731a-DOL-Retreats-on-Brokerage-Window-Safe-Harbor.pdf

It seems the "R" in the FAB you mention stands for "revised".

(My google search terms were: dol concerns brokerage windows)

[Bird]

They definitely don't like them - I think there was some public forum where Phyllis Borzi said that after the hoo-haw with the FAB and the revised Q&A - but the revised Q30 essentially still allows them.

[MoJo]

From what I've read/researched on the topic, is that the DOL doesn't see brokerage accounts as being consistent with the appropriate fiduciary duties imposed by ERISA - and that has implications with respect to 404©. Under the regs, 404© requires a plan sponsor to "select" an investment menu consisting of a selection of "diversified investments" (i.e. NOT individual securities, but mutual funds or other pooled investment vehicles), each with different risk and return characteristics which when taken as a whole would allow "a" participant to structure a portfolio with risk and return characteristics appropriate for that participant.

By simply offering brokerage accounts, the DOL believes the fiduciary has abdicated the responsibility to select that range of diversified investment options appropriate for "all" participants - leaving many unable to effectively structure an appropriate portfolio (especially considering the bewildering universe of investments out there). In other words, the DOL sees it as a fiduciary duty limit the investment options available so as to provide only that which comports with ERISA's standards.

Now, if there is a "core" lineup of mutual funds, and a brokerage option, the DOL has less concern - except that 1) they would question why there isn't an "appropriate lineup" including funds to satisfy the needs of those who elect a brokerage account; and 2) who monitors the brokerage investments for "prudence" - as required under ERISA?

Then of course, there is the whole fee disclosure debacle....

I generally advise AGAINST brokerage only plans - except in very rare circumstances, and advise that AFTER selecting a good core lineup, if, and ONLY IF, there is a demonstrated need for a few participants to have a broader choice (NEED, not WANT), then consider the brokerage option as the "next" investment fund on the risk/return continuum (i.e. if there are 12 core funds, ranging from conservative/principle preservation (SVF) through small cap growth (higher risk), then consider the brokerage account as the 13th fund - one step (or more) higher on the risk scale), document the need appropriately, and monitor its use to see that it fills that need. The problem being, is that while you can determine that the "risk" increases with the use of a brokerage account (in theory), there is no way for the plan sponsor/fiduciary to determine if the return is approrpiate for that risk - as there is no control over what the participant invests in. Also, include "criteria" in the IPS for the fact that brokerage accounts are "needed" and why, and evaluate there effectiveness against those criteria.

Interestingly, when I worked for a large discount brokerage firm that provides bundled 401(k) record keeping services (who you can "Talk To...") - where many plans had brokerage accounts, the number one holding was cash (at a lower rate and higher expense than the SVF in the "core") and that the average brokerage account UNDERPERFORMED the plan as a whole by 200 basis points (2%). So much for the doctors being smarter invertos than anyone else....