Is it difficult to implement an automatic-contribution arrangement for a brokerage-window-only plan?

[Peter Gulia]

Some individual-account retirement plans that provide participant-directed investment lack designated investment alternatives. Instead, each participant gets a securities account with a bank or a securities broker-dealer. Trade lingo calls this a brokerage-window-only plan. According to an ERISA Advisory Council report, “BWO” is mostly with small (< 100 participants) plans, and especially plans with “fewer than 25 employees.”

A brokerage-window-only plan calls the plan’s trustee to open and maintain a securities account for each participant. Although the trustee is the account’s holder, the participant instructs the broker-dealer on what securities to buy, hold, or sell.

An automatic-contribution arrangement sometimes requires a plan’s administrator and trustee to act for a participant who does not communicate (other than by not counteracting an automatic-contribution notice).

About a broker-dealer’s account-opening forms (or anything needed to maintain an account):

Does anything require a signature from the participant?

Does anything require information about a participant that the plan’s administrator lacks?

Will a broker-dealer open an account if the individual’s profile information is incomplete?

Did some brokerage-window-only plans have, before any I.R.C. § 414A condition, an automatic-contribution arrangement? Did it work, or have there been difficulties?

If your clients include brokerage-window-only plans that have a § 401(k) arrangement (or will have one by 2025), do you expect difficulties in setting up and maintaining securities accounts for those participants who neither opt out nor affirmatively enroll?

[Gina Alsdorf]

Just from a provider perspective not sure I hit all your points but, I tried. 

So this is FINCEN related, broker dealers have to have Customer Identification Programs (CIP) and do Customer Due Diligence (CDD)programs under the financial crimes regulations. There are carve outs for employee benefit plans from these rules, so technically individual participants don't need to be put through those programs, unless it happens to be a SEP or other IRA program.  I assume the rationale is employer sponsored retirement plans have a lower incidence of Money Laundering and fraud? 

The BD would still need to do CIP and CDD for the entity setting up the plan. In my own experience no participant account can be established without enough information for tax-reporting. So essentials for that would be name, address, birthdate, and social security number. Without that an account couldn't be set up. An employer usually has this readily available and could establish accounts on behalf of the participants. Typically SDBA participants have a separate sign-in to validate an account for SDBA i.e. they have to go in and accept terms in order to trade on the platform.  These are all e-signatures now, they don't do paper. There is always a money market or other cash equivalent account tied to an SDBA, they have to transfer from in order to trade. I think cash accounts are built in to SDBA programs. At least this is how Schwab and TRowe worked.  Also I would note that if an account is created with bad information, and say a duplicate SSN is found and it is discovered, any funds in that account will usually be sent back to plan sponsor f/b/o the participant because the account information for account opening was not in good order. Good order is a condition precedent for opening an account in most contracts I have seen.  

One of the reasons recordkeepers and B/Ds don't want to open accounts without information is because, they (or their related entities) are often the "payor" for the purposes of the IRC and can be fined if they don't have enough information to withhold and report.  The fines can be substantial. 

In sum, yes, the employer would have all the required information to open the account, and be able to initiate the opening, however, if a participant hasn't validated their account they would not be able to trade on the platform and funds would be held in a cash until they did and that could be forever in some cases. 

[justanotheradmin]

Gina makes some great points. 

In my day to day experience - if a sponsor or trustee on a small SDBA style plan is having trouble opening an account for a participant, they aren't doing it correctly. Since the account is owned by the plan/trust, the beneficiary of the trust (the participant) does not need to consent. If the participant's signature is required it isn't titled correctly, or the wrong type of account is being used. Plans with safe harbor non-elective or discretionary employer contributions utilize SDBA for participants all the time without their involvement. 

Some additional common issues I see: 

• Only the participant has access to the account - their access should be secondary to the trustees'/plan
• The plan does not have access (or does not want access) to the account, statements etc, they consider it to be private to the participant (how do they do any accounting?!)
• Fee disclosures for the investments aren't robust or easy to read
• QDIA might not be chosen or utilized properly if the trustee has to manually invest the money, or the QDIA notice isn't done, or there is no QDIA
• Remittance of federal tax withholding on distributions - if not using an outside service, this can sometimes require a separate account to help facilitate and often isn't done correctly
• Trading restrictions aren't set up correctly, and things like trading on margin, or purchasing illiquid assets might occur that the plan did not intend to allow 
• A different advisor is allowed to trade/manage each account, such as the participant's personal advisor for their account. This might create fiduciary issues, or even non-discrimination issues of the HCE are using their own advisors on their accounts that the NHCE don't have the same access
• Each participant is allowed to have their account wherever they want - some plans end up with accounts at 30 different places. How the deposits are remitted on time, I don't know. 
• The plans grow to a size where the number of participants and accounts to track is cumbersome. A 7 person plan with SDBA, sure. A 62 person radiology practice with SDBA that have no easy consolidated reporting options or capabilities? Not so great. 

There are lots more I'm sure I'm missing. While I appreciate the amazing flexibility of brokerage accounts, small employers often do what they want without considering the legal, tax, practical issues of having them in their retirement plans. When done in a window that provides consolidated reporting and recordkeeping they can be amazing and easy to work with. When done correctly I have no issue with them. 

[Peter Gulia]

Thanks, Gina Alsdorf and justanotheradmin.

I’m aware that a “cash” position or a money-market fund or account is a broker-dealer’s typical default for uninstructed amounts under a securities account.

But if the plan’s administrator or trustee wants ERISA § 404(c)(5) relief for a defaulted-in participant’s deemed investment direction, wouldn’t the plan’s trustee instruct the broker-dealer to invest the account in a target-year fund or balanced fund so it can be a continuing qualified default investment alternative?

Although a principal-preservation investment might be a QDIA for a first 120 days, might a fiduciary prefer a default investment that remains a QDIA if the participant continues in not communicating her affirmative investment direction?

29 C.F.R. § 2550.404c-5(e)(4)(iv)(B) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404c-5#p-2550.404c-5(e)(4)(iv)(B).

[Gina Alsdorf]

One would think. I don't disagree with you.  I just have not seen that happen.