Minimum Acct Balances

[austin3515]

Advisor says I will open an individual brokerage account for those participants who have at least $500,000 if they choose to do so. What are the implications of including accounts outside of the plan in that determination? So let's say the Participant has $100,000 in the plan and $450,000 in an IRA? the total relationship exceeds $500,000. The criteria was established by a party independent of the Plan so it shouldn't be discriminatory.

It doesn't seem at all like the self dealing issues where the financial institution throws in free banking services for the sponsor.

The brokerage account would hold only stocks, bonds and mutual funds, so I think it is ok to assume that the participants (who can invest in all of these things through mutual funds) have substantially the same opportunities.

[BG5150]

Hey, folks. You can get a self-directed brokerage account if you open up an account with the ABC Financial Services Company. What a deal!

Hey, folks. You can get a self-directed brokerage account if you buy a Ford F-150 from City Ford. What a deal!

Where does it end?

[austin3515]

I think this is quite a bit more grounded in real-world circumstances actually. If an advisor has a million bucks with someone he would be happy to add the $50,000 401k account as part of a major relationship.

[ETA Consulting LLC]

Benefits, Rights, and Features must be currently and effectively available on a non-discriminatory basis. Whatever those BRF are, they would, typically, be authorized under the written terms of the plan. I would love to see the plan language that determines who is allowed to invest their account balances in brokerage accounts; especially the part about having the determination based on criteria that has nothing to do with the plan. I think this is the point that BG5150 is making.

Good Luck!

[QDROphile]

prohibited transaction

[austin3515]

^{How is it a prohibited transaction? Who is the party who has committed the prohibited offense?}

^{This seems to be at least shrouded in murkiness... Is it really self dealing? It seems to me you could argue that it is not because it is the advisor's policy alone.}

[Bird]

I dunno. Generally, restrictions on availability of brokerage accounts imposed by a financial institution are ok. I'm not so sure this is a problem. At least part of it is about suitability, and if they know about another account they can be assured that the client has the assets for this theoretically riskier approach.

[austin3515]

Thanks Bird!

ETA, I recognized by your Good Luck! - I assume you are indeed ERISA Toolkit?

[david rigby]

There are a few prior related discussion threads, which can be found using a key word such as "brokerage" or "brokerage option".

[Peter Gulia]

Aside from nice questions about what does or does not invite difficulty for IRC 401(a)(4) non-discrimination (on which the Treasury department still hasn't furnished guidance despite many questions over the past 30 years), an employer (usually acting both as a plan's creator, and as a plan's fiduciary) might consider whether a provision about which directing persons may direct an investment other than a designated investment alternative is one that can be definitely expressed and can be administered using only the plan's records.

How about a much simpler way: The plan permits any participant to direct investment using a securities "brokerage" account. Whether a broker-dealer desires to keep an account for an individual is the broker-dealer's business decision.

[austin3515]

Well that's basically my point?

[jpod]

If FGC's last suggestion is to allow for complete open architecture, i.e., Sam can open an account with Broker X, Mary with Broker Y, and Dave with Broker Z, etc., doesn't that complicate preparation of Form 5500s/financial statements (heaven forbid it is a large plan subject to an annual audit)?

[austin3515]

We're keeping the list down to just a few "approved" advisors.

[QDROphile]

IRC section 4975©(1)(E). If the account minimum is $500,000 and the $100,000 in the self-directed plan account is necessary to achieve the minimum, the plan assets are being used for the person benefit of the participant (who is a fiduciary under the IRC even though not under ERISA) to the extent the account is used for assets that are not the plan assets. This is more obvious when the deal is a fee structure based on assets under management. The investment adviser has a fee scale that steps down as assets increase: 1.0 % for first $500,000, 0.75% for next $500,000, 0.5% for amounts in excess of $1 million. If the manager is willing to aggregate all sources, including the plan assets, then the plan assets may be contributing to acheiving the next step in the fee structure, which reduces the blended rate for all of the assets, including assets that are not in the plan (personal to the participant). If you are skeptical because there is "no harm" to getting a better price than the plan account could have achieved on its own, consider that there are two published PTEs on the subject, but limited to brokers and banks, not the average schmo. Prohibited transactions do not require harm. Perhaps your situation with the brokerage account fits into one of the PTEs.

[austin3515]

Do you have PTE numbers so I could try and find them? Also, does your analysis change if the fee structure does not take into account outside assets? i.e., they are just being used to satisfy the minimums?

[BG5150]

I'm still trying to figure out how/why access to an investment platform within a plan can be contingent on something, anything outside the plan.

[austin3515]

"How" is an operational question and "why" is a philosophical question. I think we should focus on the compliance aspect of the question.

[QDROphile]

CPTE 93-33 and CPTE 97-11

There are things other than fees that provide "consideration." Fees tend to provide more vivid illustrations.

[austin3515]

http://www.dol.gov/ebsa/regs/fedreg/notices/2002031366.htm

Section I: Covered Transactions (PTE 97-11)
...the sanctions resulting from the application of section 4975 of the Code... shall not apply to the receipt of services at reduced or no cost by an individual for whose benefit an IRA or...a Keogh Plan is established or maintained... from a broker-dealer registered under the Securities Exchange Act of 1934 pursuant to an arrangement in which the account value of, or the fees incurred for services provided to, the IRA or Keogh Plan is taken into account for purposes of determining eligibility to receive such services, provided that each condition of Section II of this exemption is satisfied.

Part of me says a big part of this exemption is the receipt of services at reduced or no cost, but I guess the point is the assumption is reduced.

And then it goes on to say that the PTE does not apply to plans covered by ERISA by extrapolation means no such arrangement taking into account outside assets would pass muster in an ERISA Plan.

So QDROPhile, you have convinced me (and impressed me).

[QDROphile]

What frustrates me is that there should be PTEs for other arrangements because, as you have observed, there is no harm. That is why we have the PTEs that we have -- no evil under the prescribed circumstances. What frightens me is that there may be some PTE or other analysis or guidanance that says there is no PT sanction in other similar circumstances and I just can't find it. Consequently my clients are schmucks who end up being restricted because they have the "benefit" of my advice while everyone else is having a good time and getting discounts.

[austin3515]

Follow up question. At what point do we need to inform participants about this other opportunity to have the self directed brokerage account? Assume RIA's minimum account threshold is $500,000. Can I limit disclosure of the arrangement to participants who have $500,000?

[Belgarath]

IMHO, probably not. Such a feature might inspire them to contribute more, or roll money into the Plan from another account if the Plan permits rollovers.

That's based upon "gut feeling" and without doing any research on what is truly "required" for this disclosure.

[BG5150]

Follow up question. At what point do we need to inform participants about this other opportunity to have the self directed brokerage account? Assume RIA's minimum account threshold is $500,000. Can I limit disclosure of the arrangement to participants who have $500,000?

What if someone has $100k in the 401(k) Plan but $600,000 with another institution? (And that money could be moved into an account with the RIA) How would you know about it? Shouldn't that person be aware of this newly-available investment option?

[austin3515]

I hate good points with a passion sometimes.