Brokerage accounts and plan sponsor responsibility

When a Plan chooses to allow brokerage accounts, is it acceptable for the Plan Sponsor to expect the participants to get them a copy of the statement(s) at the end of the year? Should the Plan Sponsor be receiving a copy of each individual statement monthly or at least quarterly? What are the consequences if they are not keeping copies themselves? 

The plan's named Trustee has responsibility for delivering asset reporting to the Plan Administrator, the frequency can be monthly, quarterly or annually as needed by the PA (or its designated/contracted TPA) to properly administer the plan. The Trustee and Plan Administrator could, but need not, both be the Plan Sponsor. If the Plan Sponsor is neither, it still has the obligation to oversee each in fulfillment of their fiduciary duty. The consequences of lack of required financial reporting is a fiduciary lapse.

Participants are not required to keep (or provide) copies of their own brokerage statements any more than they are required to keep their "regular" quarterly statements. It's a good idea but not a requirement.

The plan’s fiduciaries should get the securities broker-dealer’s records at least as needed to administer the plan and its trust, and to obey ERISA § 107 and § 209 and Internal Revenue Code of 1986 § 6001.

Also, a careful plan sponsor and plan administrator might edit the plan documents, trust agreement or declaration, investment-direction procedure, summary plan description, and other documents and communications so whatever account-stated, arbitration, and other provisions end or limit the broker-dealer’s responsibility to its customer also reasonably end or limit the directing participant’s (or beneficiary’s, or alternate payee’s) rights and remedies regarding the plan and the plan’s fiduciaries.

Why risk even a possibility that the plan could face an obligation to a participant even arguably greater than the broker-dealer’s obligation to the plan’s trust?

The trustee is, or should be, the owner of the account(s), and the participant's role should be limited to directing investment transactions. Accordingly, the trustee should get, or be able to get, statements on the accounts and definitely should not have to rely on the participant(s). Since financial advisors and/or behemoths such as Fidelity have a strong presence in this end of the market, it is no surprise that the accounts are often set up incorrectly.

Imagine a group of about 15 radiologists (no non-physician participants) who each have their own brokerage account a places such as TD Ameritrade(now Schwab), Fidelity, Edward Jones, etc.  Some have financial advisors which is very helpful, others are self-service accounts.  And then one of the doctors says we are replacing a trustee - please go to all the custodians and get the Trustee added and or one removed on all accounts.  It can be a nightmare.

Some practitioners set up a distinct plan for each individual. (Following Tom’s example, 15 plans.)

If such a plan covers only an owner and no employee, the plan is not ERISA-governed.

Each individual (or her corporation or LLC, if she has one distinct from the group’s business entity) is her plan’s administrator and trustee.

Each individual is responsible for her plan’s Form 5500 return. No owner need be responsible for another’s plan information.

And if the group has an employee, they set up another distinct (ERISA-governed) plan, under which only employees participate.

Minimum participation, coverage, nondiscrimination, and top-heavy are counted on the § 414 employer. Among other provisions to meet nondiscrimination, the plan for employees (if any) includes a participant’s right to use a brokerage account.

15 hours ago, Tom said:

Imagine a group of about 15 radiologists (no non-physician participants) who each have their own brokerage account a places such as TD Ameritrade(now Schwab), Fidelity, Edward Jones, etc.  Some have financial advisors which is very helpful, others are self-service accounts.  And then one of the doctors says we are replacing a trustee - please go to all the custodians and get the Trustee added and or one removed on all accounts.  It can be a nightmare.

Had a similar situation with a client back when I was in Lexington, KY. They ended up seeking approval from the State Dept of Financial Institutions to have their medical practice operate as a trust company only for their retirement plan and got approval. So the PC became the trustee for all the accounts.

Managing the titling of SDBAs can be a major PITA where the plan allows each participant to set up the account and the financial institution plays hardball and insists that the names of individual trustees appear in the title.  The greatest pain comes when one of the individual trustees leaves the company or worse, dies, and the financial institution insists that they will only accept an instruction if it is authorized by all of the trustees named on the account.  The paperwork and time delays can drag on for months.

When we work with a plan that wants to let participants choose their own brokerage (or even multiple brokerages),  we explain this issue up front and strongly encourage them to not set up any accounts until they and we have an opportunity to review the account paperwork before that paperwork is signed.  We look at things like the titling of the account, authorizations for the accounts to hold assets like limited partnerships, hedge funds, gold, annuities, real estate, and authorizations for the participant to participate in transactions like private placements or option trades.  We also look at the financial institutions reporting to the plan administrator and to us as recordkeeper.

We recommend keeping things simple and setting boundaries applicable to all participants. We don't always get our way and when we don't, we explain that the additional work for working with assets or accounts outside the boundaries will be billed (with a recommendation that the participant's account pays the fee).  The biggest headache is when a trustee in senior management has a kid who just graduated from college and joined a financial firm.  That trustee wants throw a little business to the kid get the kid's first sale and doesn't want to hear about how big a pain an uncontrolled SDBA can be.

Bottom line, we like to see accounts titled as [Trustees of Name of Plan] FBO Participant so any change is trustee effectively happens upon the formal addition or removal of any individual, and we want to be copied on statements (electronic or paper) with the most frequent reporting (typically monthly).

The solution Bill Presson describes—making a corporation the trustee that holds record title to several brokerage accounts—might be one available to employers in some States.

While many States’ laws prohibit a corporation that’s not a bank or trust company from engaging in a business of serving as a trustee or other fiduciary, a State’s law might permit a corporation to serve, without compensation, as the trustee of a trust for an employee-benefit plan for the corporation’s employees.  To pick just one example, Pennsylvania’s Banking Code expressly permits a nonbank corporation to act as trustee of a trust “for the benefit of [the corporation’s] own employe[e]s[.]” 7 Pa. Stat. § 106(a)(iii).