Individual Brokerage 401k

[Bruce1]

Our firm is managing the investments and the administration for a client where each participant has individual brokerage accounts. We process def, match, and ps into each of their individual brokerage accounts. For those who have client's that aren't at traditional record keepers, is it recommended to have individual accounts for each money source? 

[Bill Presson]

I’m not a fan of different accounts for each source. The only exception I would concede is maybe Roth money. 

[Gadgetfreak]

But then you need to be concerned that the plan is set up with immediate vesting and distribution sources are uniform across all sources. But yes, separate one for Roth is needed. 

[Bill Presson]

5 hours ago, Gadgetfreak said:

But then you need to be concerned that the plan is set up with immediate vesting and distribution sources are uniform across all sources. But yes, separate one for Roth is needed. 

I don’t agree with this. We have lots of clients using a single brokerage account per person with multiple sources. We track all of them in our system despite different vesting schedules and distribution timing. 
 

It’s not really different than having a single pooled investment with the same things. 
 

These kinds of plans have existed for a lot of years before daily valuation services were created. 
 

ETA: "not" above

 

[Gadgetfreak]

Wow. That seems like a lot of work. SDBAs have daily access, and someone could potentially request a distribution at any time. Vesting needs to be updated—as do sources—before that happens. If deferrals are being deposited on an ongoing basis, wouldn't you need to track each payroll for each SDBA often? With pricing coming down and providers offering flexible billing options, I suspect a daily platform would be more cost-effective than a TPA doing all that. 

[Bruce1]

Gadget we're likely taking this plan to a recordkeeper for this reason. The investment management subsides our administration. We've eliminated the option for hardship distributions, loans, and in-service distributions . The plan document makes terminated employees wait until after year end and after all contributions go into the account. It makes calculating their money types easier. 

12 minutes ago, Gadgetfreak said:

If deferrals are being deposited on an ongoing basis, wouldn't you need to track each payroll for each SDBA often?

Not really. 

[Gadgetfreak]

Agreed. If the only way to get a distribution is to wait until after the year-end valuation after you terminate, then you only need to update the participant's records once a year. Of course, if there is a vesting schedule, the balance the employee sees in their SDBA daily might not be accurate. But I get why SDBAs would be better than an annual val as it allows participant direction.

Another option we, as a recordkeeper have been doing for new clients is linking Schwab PCRA accounts to our daily system. It is the best of both worlds. Daily RK, participant direction, full fund universe of an SDBA, and no issues with ongoing distributions, sources, or vesting. PM me if you want more details.

[Paul I]

As @Bill Presson noted, plan accounting for SDBAs for individual participants existed many years before than daily valuations applied across the entire plan.  The plan accounting methods used for those SDBAs are fully compliant with all requirements for any defined contribution plans.  Note that there are multiple approaches to the accounting techniques so the math may differ, and the results may vary slightly, but all are compliant.

This also happens to be true about daily valuations.  Not all recordkeepers use exactly the same plan accounting math and the results do vary slightly, but each recordkeepers' results are compliant.

There are many variables that come into play.  Some are related to plan design like, as @Gadgetfreak notes, includes vesting, administrative fees, Roth tax basis, investment in contract from other already taxed amounts, prior partial distributions, and loan accounting to name a few.  Others are related to the type of investment that may be permitted in the SDBA like employer securities, limited partnerships, private placements, periodically valued investments, certificates of deposit, non-benefit responsive GICs and gold bullion to name a few.  There also may be a need to accommodate securities that will only trade in whole shares.

I have seen and done plan accounting for all of the above, and all of that plan accounting is and was fully compliant.

Timing of transactions is not an issue.  Distributions from fully or partially vested sources, could be made daily (if the assets were liquid). 

Practically, SDBAs that have several complicating features require can require individual attention and that comes at a cost, and the plan can have that cost paid by the participant's SDBA.  That added cost should factor into the plan sponsor's decision whether to have SDBA's and, if allowed, whether there will be restrictions placed on the sources that can be in the SDBA and the types of investments that can be held in the SDBA.

As an industry, we all are obsessed with being 100% accurate, but what we really are obsessed with is being 100% compliant.  An the often unrecognized beauty of the laws and regulations that govern the plans we work is the flexibility to creatively design and recordkeep a plan that meets the objectives of the plan sponsor.

 

 

[Bill Presson]

2 hours ago, Gadgetfreak said:

Wow. That seems like a lot of work. SDBAs have daily access, and someone could potentially request a distribution at any time. Vesting needs to be updated—as do sources—before that happens. If deferrals are being deposited on an ongoing basis, wouldn't you need to track each payroll for each SDBA often? With pricing coming down and providers offering flexible billing options, I suspect a daily platform would be more cost-effective than a TPA doing all that. 

Depends on the size of the client of course. We usually would only do SDBAs for everyone if the client was smaller than 10 participants. Pooled plans can be much larger.

[RatherBeGolfing]

3 hours ago, Bill Presson said:

Depends on the size of the client of course. We usually would only do SDBAs for everyone if the client was smaller than 10 participants. Pooled plans can be much larger

A long time ago, I had several SDBA only plans with 100+ accounts...  I could swim in monthly statements like Scrooge McDuck when I did the year-end work.  I don't miss those days.

At my current firm we are daily val and only allow SDBAs from our RK platform.  All the activity rolls up to our trust statement so it really doesn't matter how many SDBAs are in a plan.

 

[Bill Presson]

23 minutes ago, RatherBeGolfing said:

A long time ago, I had several SDBA only plans with 100+ accounts...  I could swim in monthly statements like Scrooge McDuck when I did the year-end work.  I don't miss those days.

At my current firm we are daily val and only allow SDBAs from our RK platform.  All the activity rolls up to our trust statement so it really doesn't matter how many SDBAs are in a plan.

 

Understood. We appreciate all the SDBA plans we get because you don't do them. 😇

[RatherBeGolfing]

15 hours ago, Bill Presson said:

Understood. We appreciate all the SDBA plans we get because you don't do them. 😇

HA!  Better you than me Bill  

[Bri]

Does everyone "really" treat SDBAs as true daily val where required, or are TPAs just pro-rating a year's worth of gains among the sources based on some prior balance? 

I've seen way too many plans run allocate earnings like mini "pooled accounting" setups for each employee, where the receivable is just the beginning balance for the next year with earnings not truly determined at each transaction's source's level....

I mean, I've seen it done properly, but I've also had to suggest the plan documents not indicate daily valuation, because it's 10x the work to do it properly "from scratch".

[Paul I]

Daily valuation uses end of day market values or end of day asset positions (as appropriate for the transaction).  When we recordkeep SDBAs, we use end of day market values or end of day asset positions (as appropriate for the transaction) in the participant's account.  It all works if the brokerage account is readily available to us via the financial advisor, participant or read-only online access.

@Bri does raise an interesting point about plan provisions that provide check boxes to choose the plan's Valuation Dates.  Typically the document has an annual Valuation Date be default and then allow choices like daily, monthly or quarterly and maybe an option to describe other dates.  These choices may also be made for each contribution source.

I am curious:

• Does anyone use the describe line to identify the SDBA as a real-time Valuation Date?
• Does anyone with a daily plan that holds assets that are not valued daily (e.g., real estate, LPs) use the describe line to disclose that some assets are not valued daily?