FBO Account Fee Disclosures

[austin3515]

Are people finding that the brokerage houses of the world are sending out their 408b2 disclosures to the plan sponsors of plans whose participants invest in individual brokerage accounts?

Or perhaps the answer is that they had already been disclosing everything that required disclosures due to existing SEC regulations?

[Bird]

Yes and no. Some have that plugged into a system, and generate something that references 408b2 or at least seems tailored to those rules.

When the rules were first effective, we contacted sponsors, generally copying the brokers, noting the importance of receiving the disclosures, otherwise, if the fiduciary didn't follow up and/or consider removing the broker for failure to disclose, the fiduciary would be considered to engage in a PT. We got a range of responses from the brokers, some supplying their basic fee schedule (as you note, under SEC regulations) which probably more-or-less complied with 408b2. And some provided us with 111 page pdf documents that referenced vague and inadequate websites and basically said "here, you asked for it, you prepare it."

[J Simmons]

These days I often suggest merging the FBO accounts into a single, pooled investment account, and having an investment committee (appointed by the plan sponsor) take over all investment decisions, and follow and document their periodic meetings and discussion/votes on specific recommendations from a selected investment advisor. I think that there is less risk in this approach than the daily penalties potential avoided with quarterly statements required since 2007; and unless your fee disclosures for each account are up to snuff, then the plan officials would have no 404c protection anyway.

Some employers have just pulled the trigger on this and continued the existing plan with the pooled account going forward. Others have terminated the plan that had the FBO accounts, and set up a profit sharing-only plan with pooled account for future benefit accruals, and will then add a 401k feature after 12 months. If timed right, no one really loses any elective deferral annual cap opportunity. Doing this allows the employees to continue directing the investment of benefits accrued under the old, terminated plan if they had their benefits under it rolled into an IRA. And they know going forward that as to future benefit accruals, they do not have that option--and do not feel as slighted because they are not losing the option of directing investments on previously deferred earnings.

The brokerage houses have come up quite short in helping the plan sponsors meet these new regulatory requirements that attend to participant directed investment. So, rather than expose the plan sponsors to daily per employee penalties for the brokerage house's shortcomings, I think it better to go pooled. Also, it makes it easier for the investment committee and/or plan sponsor to go from one investment brokerage to another, where there is just the one, pooled account to transfer. So it makes the plan and its accounts less captive to a particular investment brokerage.