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SDBAs for owners (can it be done?)

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[I know the answer is it SHOULDN'T be done, but I'm looking for CAN.]

Got a pooled 401k plan that is transitioning to individual accounts.  There are enough people such SDBAs for all of them would be horribly inefficient, so they decided to go with a fund platform.  However, the FA just told me that they will do SDBAs for the owners.  This immediately set off all the alarm bells.

Of course it's a bad idea, but what is the latest and greatest about how it can be done with some degree of confidence that it will pass the sniff test?  I'm thinking:

1. No minimums allowed to open one.  Note sure about minimums on any particular investment.
2. All participants must be given the option to do so.  We've got a few plans that have had this set up for years (and keep resisting change), and on those we already have a boilerplate participant election form.
3. 404a5 fee disclosure notice.

I was thinking about a set fee for the SDBAs each year to represent the additional time spent reconciling them; I'm not sure I could easily get the SDBAs to send me the fee from the account each year, but I think would be OK.

Ideally, there's some kind of citation that I can use to argue against this, but failing that, I at least want to put this on as solid ground as possible.  Any thoughts?  Thanks.

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Since there is no official guidance on the effective availability requirement under 1.404(a)(4)-4(c), I'm not sure what degree of confidence there is - depends on how aggressive you are (or more to the point, how aggressive your client is willing to be). Your proposed parameters seem pretty safe to me, although the minimum value to have a SDBA could be an issue. If, for example, the minimum is say, $5,000, and 90% of the NHCE's have $5,000 or more in their accounts, then it seems "reasonable" that this would qualify. I would tell them, if they wish to pursue this, that they need ERISA counsel opinion, etc. - the usual CYA stuff.

And of course, the plan fiduciary must determine that the fees are prudent and reasonable, etc., etc., and a flat fee for small brokerage accounts might not qualify.

As you said, potentially a bad idea on many levels. 

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There are some custodians that offer brokerage windows within their retirement product offerings. Worth looking into, and then all the participants would still be with XYZ recordkeeper, but could have way more options than just a regular fund line up. and getting year end reporting/ statements/transaction history is SO MUCH EASIER

I agree they are terrible for plans. Even though I work on a lot of plans with them. 

Is the plan going to limit what kind of SBDA? maybe to a single financial institution? or are folks going to be allowed to pick their own, wherever? having all the accounts at schwab is simpler than a dozen accounts a dozen different places. And is each account going to have a different advisor? I don't like it when plans tell participants their personal advisor can be the advisor on their account. Accounts often don't get set up correctly, the plan needs to be the owner, the trustees on there, and the participant is only an FBO so they shouldn't be the one controlling the account anyhow. interested party/duplicate copy statements for the trustees, the TPA etc don't always get set up right. And I don't think I've never seen a good participant fee disclosure from a SDBA financial institution, and I doubt the plans are keeping copies of them. 

I guess my main question is WHY do they want SDBA as part of the plan? Also - if the owners think the investments in an SDBA are so good for themselves, why wouldn't those investments be good for the rest of the participants? 

If the owners can take distributions out - I would suggest they do so, and roll the money over to an IRA wherever they want, and leave the plan assets in a proper recordkeeping arrangement. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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Some recordkeepers provide in-platform records of participant-directed broker-dealer accounts if the plan uses the broker-dealer the recordkeeper has an arrangement with.

I express no view about whether to use these accounts, and observe only that it might be possible.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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