With a brokerage window, does the employer get details on which stocks employees buy and sell?

[Peter Gulia]

When a retirement plan allows a recordkeeper’s brokerage window:

Does the plan’s named fiduciary get reports on the details of which stocks, bonds, and other securities each participant buys, holds, and sells?

Or does the named fiduciary get access to a database with that information?

Is that reporting or access routine?

Or must the fiduciary specifically ask for those services?

[BG5150]

I would think the Trustee has access to participant statements even though it would be on an ad hoc basis (if they aren't online somewhere).

In fact, I would think the Trustee MUST have access to that information.  Those accounts don't belong to the participant (yet), they belong tot he trust FBO the participant.

Same with the plan administrator.  I would think they must have access tot he current assets and transactions within the plan.

[Paul I]

Pretty much every brokerage house provides online access to the account holder.  There is a minority of brokerage houses that provide trustee or PA access to a group of accounts even though each account is titled in the name of the trustees FBO a participant.  Exceptionally frustrating to work with.

We work with some plans where the brokerage house is of the opinion that the participant must authorize online access to the account and must authorize mailing a hard copy of the account statement to the trustee, PA or TPA.

There is a minority of brokerage houses that enforce investment restrictions in a participant's brokerage account.  These accounts most commonly are restricted to securities tradable on major stock exchanges. 

Trustees and PAs do need to monitor investments held brokerage accounts because without the brokerage house enforcing restrictions, the plan winds up with assets like limited partnership, private placements, naked put and call options, real estate, gold bullion and other nontraditional or high-risk investments.  We have seen all of these turn up in accounts.

Larger plans tend to require all participants who wish to use a SDBA to use the brokerage house chosen by the Plan Sponsor or PA.  Small plans are more likely to allow individual participants to pick their own brokerage house and broker.  (Enter into the picture here the owner's recently-graduated children, or Uncle Bob, or Joe at work who knows all about investing...)

Unfortunately, working with a plan that uses a brokerage house that does not provide to the trustee or PA at a transaction and asset level can be a very labor-intensive effort, particularly when a plan is subject to an audit.  Further, the plan fiduciaries are not aware when a broker who knows all about IRAs and squat about 401(k)s advises the participant about RMDs or suggests taking a payment and rolling it back into the account within 60 days.

SDBAs definitely can add value to a plan's investment menu.  It is important to work with a brokerage house that knows about and provides information needed by plan fiduciaries for the fiduciaries to fulfill their responsibilities.

 

[Peter Gulia]

Beyond a plan fiduciary’s other needs, my query is motivated by employers that restrict or restrain an employee’s personal securities trading. For example:

A law firm might restrict trading in securities issued by the firm’s client, identified prospective client, and either’s opponent or known party to a contract.

An accounting firm might restrict trading in securities as needed to maintain an audit practice’s independence and availability for current and reasonably anticipated clients.

A firm of actuaries might restrict trading in securities to avoid conflicts or maintain independence.

A firm that sometimes serves as an appraiser, independent fiduciary, or expert witness might restrict trading in securities to maintain independence.

For these employers, a lack of computer feeds could make a brokerage window a nonstarter.

[ESOP Guy]

I once worked for a company that allowed brokerage window in the 4k plan.   The one restriction was you couldn't buy the employer's stock.  They didn't want the brokerage window to be a way around the restrictions on company stock in the plan.

You example might be harder to get a broker to keep a list of stocks that can't be bought and having to update it regularly but that might get to the same place it seems like.  

[Peter Gulia]

I wasn’t suggesting asking a broker-dealer to apply an employer’s restrictions. (For some employers, a list of restricted securities could number in the thousands.)

I’m aware only that some employers want daily visibility into participants’ brokerage-window accounts, so the employer’s compliance analysts can check that a participant has no unapproved holding.

[Paul I]

A brokerage house who understands the retirement plan industry will apply restrictions on type of securities that can be purchased.  The capability is already baked into the validation of a trade instruction.  Some go so far as to accept a modest list of specific investment such as mutual funds that are held in the plan's list of core mutual funds.  This keeps a participant from investing in higher cost share classes or from paying trading frequency penalties when the participant can use the core fund menu.

If an employer wishes to have visibility into participants' SDBAs, then the employer should do the due diligence on the capabilities of the broker or brokers that participants are permitted to use within the plan.  We worked with one client with around 20 different brokers handling accounts for about 60 participants.  We set up a list of requirements and if the broker did not agree to restrict the account to permissible assets and to provide electronic access to the trustees, participants were not allowed to use that broker.  When the requirements were implemented, there were a handful of participants and their brokers who objected.  The company made no exceptions and participants who wanted to continue having an SDBA acquiesced. 

[Peter Gulia]

Thanks again.

For the situations I’m thinking of, a retirement plan would allow only one broker-dealer, and only the one aligned with the recordkeeper.

An employer would not furnish its restricted list to the broker-dealer, because doing so would reveal the employer’s clients’ confidential information.

[RatherBeGolfing]

23 minutes ago, Peter Gulia said:

Thanks again.

For the situations I’m thinking of, a retirement plan would allow only one broker-dealer, and only the one aligned with the recordkeeper.

An employer would not furnish its restricted list to the broker-dealer, because doing so would reveal the employer’s clients’ confidential information.

In this situation, I think it will depend on the RK.  Back when I only did TPA work, some RKs would have an SDBA option that was part of the same trust.  In that case, the SDBA activity could be accessed through the RK platform.  Other RKs would have an SDBA option where the balance could be seen, but not the activity.   This was as of 2020 or so.  I wouldn't be surprised if more RKs are able to provide all activity at this point.  Third party developers can API millions of data points every day for many of the apps in your app store, there is no reason SDBA data can't push to an RK in real time or at least daily.

[Paul I]

20 minutes ago, RatherBeGolfing said:

Third party developers can API millions of data points every day for many of the apps in your app store, there is no reason SDBA data can't push to an RK in real time or at least daily.

From the standpoint of technology, I agree.  There are brokerage houses that take the position that the participant is the owner of the account even if the account is titled "Trustees of Plan FBO Participant".  The brokerage house then takes the position participant's privacy supersedes the trustees right and need to monitor the information in the account and will not grant the trustees access.

[Belgarath]

Question - asking from sheer ignorance on the details of this issue. If the plan fiduciary allows investment in brokerage accounts/investments where the fiduciary is not allowed access to the information necessary to properly carry out fiduciary responsibilities, might this be considered a breach of fiduciary duty?

[Peter Gulia]

Individual-account retirement plans’ fiduciaries differ widely on what oversight and monitoring (if any) is proper or prudent regarding participants’, beneficiaries’, and alternate payees’ directed investment using securities accounts.

Further, some plan’s creators specify in one or more governing documents which steps a fiduciary must, may, or must not take. Yet, even when those provisions are clear, fiduciaries sometimes consider whether one must disobey a plan’s provisions as inconsistent, whether generally or in particular circumstances, with ERISA’s title I.

In my experience, few fiduciaries consider anything about investment merits, except expenses.

Some fiduciaries consider restrictions for points beyond investment merits.

Instead of a plan’s fiduciary doing the work of examining accounts for troublesome holdings or transactions, a fiduciary might rely, at least primarily, on the broker-dealer’s representations, warranties, and continuing covenants that the broker-dealer will restrict each securities account’s holdings and transactions to apply the plan administrator’s specified restrictions.

Some of the more common exclusions are:

open-end funds available as a designated investment alternative;

securities issued by the plan’s sponsor, a participating employer, or an affiliate of any (even if one or more of these is not employer securities);

securities that were employer securities regarding the plan during a specified past period;

securities not traded on at least one nation’s national securities exchange (except securities that were exchange-traded when acquired);

securities, commodities, or other property for which the plan’s trustee, custodian, and subcustodians lack enough control of ownership to meet ERISA § 404(b);

securities, commodities, or other property for which the broker-dealer does not determine and report fair market value;

anything that could result in a loss in excess of the individual’s account balance.

Some fiduciaries prefer not to know what a particular individual directs investment in.

If an employer does not need visibility to check for the professional-services points I describe above, an employer/administrator might prefer not to have “too much information.”

[RatherBeGolfing]

4 hours ago, Paul I said:

From the standpoint of technology, I agree.  There are brokerage houses that take the position that the participant is the owner of the account even if the account is titled "Trustees of Plan FBO Participant".  The brokerage house then takes the position participant's privacy supersedes the trustees right and need to monitor the information in the account and will not grant the trustees access.

In my example, the RK offers the SDBA through a "connected" provider.  For example, if you use the [redacted] RK platform, you can establish an SDBA with Schwab (and only Schwab).  In these cases, I think technology is more likely to be the issue than privacy concerns.