Brokerage commission discrimination issues

[MoJo]

I hate to go here again, but an issue has come up with respect to a client involving the use of a brokerage account in a 401(k) plan. The provider maintains a brokerage commission schedule with reespect to "retail" (non-401(k) plan) account which provides for discounted brokerage commissions if the account owner maintains certain minimum account balances. The provider is considering two things: 1) have the same, or a similar, commission schedule for brokerage accounts in 401(k) plans (where the breaks are pretty steep - $100K or so); and 2) aggregating retail and 401(k) accounts for purposes of the breaks. I think #2 is clearly a bad idea, but haven't found anything with respect to #1. My gut tells me that being a vendor imposed condition, this may be appropriate.

Any discussion?

[Jon Chambers]

I've heard (and participated) in discussions on issue #1 at several conferences. I doubt you have a BRF issue with IRS. I agree with your gut reaction that it shouldn't be an issue with DOL either, but note that DOL has recently taken numerous aggressive (and counterintuitive) positions on issues such as fees. It's certainly conceivable that DOL would argue that bargaining power is at plan level, not individual account level, and consequently any breaks in commission rates should be available to all participants. It's also not beyond the pale for the DOL to argue that it would be a breach of fiduciary duty for plan sponsor not to push for commission rate breaks for all participants, particularly if decision makers are the large balance participants that would get the breaks under the "breaks for large balance only" scenario. The only way to know for sure is to request an opinion letter from DOL.

[MoJo]

Thanks Jon. Yes, I agree the bargaining power is at the plan level - which puts a different light on the subject. Turns out that service provider is actually looking to scenario #2 above - with "total household account balances" taken into account (and not just the participant's).

[Jon Chambers]

For what it's worth, when I've discussed this issue with service provider representatives, they generally don't seem to "get" the ERISA and fiduciary issues. They're so focussed on their internal budgeting and profitability models, and so focussed on the individual account instead of the plan, that they often miss the bigger picture.

[Erik Read]

I work with one consultant/advisor who has gone to fund families on behalf of all his clients and negotiated the Break Points on a "relationship" basis.

For example lets say and fund has a very high minimum investment for the "institutional" share class, our guy get's letters of intent from his clients, then negotiates a relationship basis with the fund family, as long as he is the "broker" of record on those accounts, they're eligible for the share class and/or break points.

Just another tool to use, that takes the plan out of the picture, and puts some of the responsability back in the hands of the investment manager. Keeping in mind, his clients are smaller, trustee directed plans and not your large 401(k) with participant direction, so he does have control to be sure the assets flow to those funds.