Individual Choice in Self-Directed Brokerage Programs

[Guest kfel]

Heard recently that the self-directed brokerage option will allow plan participants to choose any brokerage to his or her liking. How would this be accomplished? Who would process the tax reporting? How would exchanges into and out of the SDB account and the Core account be facilitated?

[MoJo]

I'm aware of one service provider that does this - a bank. The way they handle it is by utilizing their trust accounting platform as an order entry system. A broker, from whatever brokerage house the participant selects, has limited access to the trust accounting system for purposes of placing trades. The system then sends the actual trade request back through the broker for execution (and commissions!). Since the trust accounting system clears all trades, the service provider has all information for purposes of reporting. Also, custody of the assets remains with the bank, and a shadow account is on the books of the brokerage firm. Monthly trust accounting statements are then generated for both the participant and the broker (to ensure balance with their system).

The ultimate question is why do this? For the service provider, not only do they lose management revenue from the loss of managed assets, they also lose out on commission income from the trades.

[Guest]

There are several alternatives of how someone might make self-directed brokerage accounts available to plan participants. The key is in how those accounts will integrate with the other core investments available in the plan and in getting all the appropriate reporting completed.

There are several ways this can be accomplished, but it is imperative that an automated link be established to place trades efficiently and to provide effective reporting from the broker/dealer where the SDA account has been established.

It can be very expensive to allow participants to use their own broker/dealer for the self-directed brokerage account. Getting the information in your recordkeeping system needs to be automated. Typically, you would only allow one or two SDA options for the plan.

I'd be happy to discuss some of the alternatives available. Just send me an email at carol@cjrconsulting.com