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8 responses to “Is the Fiduciary Liability of Self-Directed Brokerage Options Too Great for 401k Plan Sponsors?”

  1. earl

    most of your objections are non-starters (IMHO). the big liability i see that you don’t seem to mention is that, under 404c, fiduciaries are not responsible for choices participants make. that leaves open “what if participant never makes a choice?” 100% in the MMkt for 5 years. what fiduciary responsibility is there for the plan sponsor for those accounts?

  2. Michael McMorris

    I think it’s worth pointing out that there are two different scenarios where self-directed brokerage accounts are used in 401(k) plans:

    1. An investment platform is offered with core investment options (DIA), primarily mutual funds, and a QDIA. IN ADDITION, an optional brokerage account “window” is available to those participants who want it (and usually are willing to pay an additional fee). This “window” arrangement is primarily what this article, other articles and the DOL FAB addressed.

    2. The plan only allows investments within self-directed brokerage accounts, so every participant has one. There usually isn’t a core lineup of funds. Most of these plans use one broker/dealer firm and is usually serviced by one broker of record. But some plans allow participants to use their own broker from any broker/dealer. This arrangement hasn’t been widely discussed in terms of fee disclosures and new fiduciary definitions

    In either case, what are the special fiduciary concerns and disclosure requirements, if any, if a broker or fiduciary is limiting the options available to a participant within the brokerage account? For example, if only certain funds or managed products are available. What are the DIA/QDIA?

    In either case, a plan shouldn’t set a minimum balance requirement to qualify for a brokerage account or any other investment option, or else they may run into a benefits/rights/features discrimination violation.

    As noted in the article, many small businesses, especially medical/professional groups, use brokerage accounts. Some as an option, others as the only option. Usually this is because those participants with high balances (usually owners/doctors/lawyers/execs) would like to have more investment options (stocks, bonds, ETFs, managed portfolios, etc.) than just a lineup of mutual funds, and those participants can afford the additional cost and administrative work associated with the brokerage account. So I think it’s important to note that not every employer is alike, and so not all 401(k) plans should be alike. In some cases, the plan’s fiduciaries may be prudent in limiting the employees’ options to a strong lineup of mutual funds. But in other cases, it may be more prudent (even if more expensive and cumbersome) to allow more options. Attorneys and risk managers may sleep better if all plans produce safe returns of 2-8% with low volatility. But some investors are looking for bigger returns and understand the risk of aiming higher, or they may simply have an aversion to mutual funds for whatever reason. Many young employees have relatively low balances but are perfectly capable of making informed investment decisions with the help of an investment advisor, so why limit them to a list of 10 mutual funds?

    Brokerage accounts have been provided to many plan participants for decades. And the majority of most workers’ savings are in 401(k) plans. Many workers don’t have enough savings outside their plan account to invest effectively in individual stocks/bonds, or in portfolios available to higher balances. So, as long as the broker of record is available to answer questions about the options, and the plan’s named fiduciaries make it clear that investing in anything available under the brokerage sun can be a risky venture, and the fiduciaries/broker disclose the applicable fees/expenses, isn’t the AVAILABILITY of a brokerage account a good thing for some participants? At what point do we draw the line on blind paternalism and introduce a bit of personal responsibility in the name of achieving great participant outcomes?

    Just asking questions.

  3. June 12, 2013 | The Morning Pulse

    […] Is the Fiduciary Liability of Self-Directed Brokerage Options Too Great for 401(k) Plan Sponsors? […]

  4. John Henry

    “under 404c, fiduciaries are not responsible for choices participants make”

    Under 404(c) fiduciaries are not LIABLE for for any losses which result from choices a participant makes, provided ALL the required disclosures are made. That is not the same as “not responsible”. Fiduciaries are responsible for the investment funds that are placed within in the plan.

  5. Brian Kehm

    In 2006 a research paper on 403(b) under diversification was published, “What’s in Your 403(b)? Academic Retirement Plans and the Costs of Underdiversification.” The paper quantified the returns of diversification with the current investment options compared to an expanded menu. In their research they found, with optimal rebalancing over a forty year work life, an employee could lose more than half of terminal wealth, compared to investing in the expanded menu.

    A catch 22

    Preventing the potential loss from continued under diversification requires an offering of many new funds. This could allow the inexperienced investors in 401(k) and 403(b) to take on highly risky investment strategies from the core funds offered. Keeping the current core funds and adding a brokerage window could allow the investment knowledgeable employee as well as the professionally advised employee to properly diversify, while other employees may avoid using the brokerage window since they would be unfamiliar with the choices available there.

  6. Maureen Horner

    Brokerage Windows and Fiduciary Liability

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