Wednesday, June 20, 2012

Self Directed Brokerage Window Brou Ha Ha!


It took a few weeks, but the industry made enough noise about FAQ 30 from the DOL's May 7th release of FAQ's pertaining to Fee Disclosure.  This author posted on June 6th that our interpretation of this FAQ is that it made it effectively impractical for Self Directed Brokerage Accounts to exist in plans of any real size.  Phyllis C. Borzi, assistant secretary of labor for DOL's Employee Benefits Security Administration (EBSA), said June 18 at the SPARK National Conference that a second set of FAQ's will be forthcoming after July 1st some time.

At the same conference, she did discuss FAQ 30 and basically stated that the industry was overreacting to it and that the spirt of it is that plan fiduciaries must have policies in place to monitor investments and ensure prudence.  See below for an article that discusses the dialogue.

Our interpretation of the FAQ remains the same.  Ms. Borzi's comments simply reiterate what we feel which is that Self Directed Accounts can still be used in plans, but from a practical perspective can become a very difficult investment choice because of the need to monitor the underlying holdings.  When these brokerage accounts are not in a vendor window, but rather are scattered among various/many brokers it can be a near impossible task for any plan with a substantial number of brokerage accounts.

Friday, June 8, 2012

Fee Disclosure FAQ's, some thoughts on Fee Disclosure - Are Brokerage Accounts on Death's Doorstep?

O.k., so if you're in the Retirement Plan business, you are aware that in a few weeks (July 1st) all the new Fee Disclosure Rules will be in effect.  In early May, the DOL published Field Assistance Bulletin 2012-2 (FAB 2012-2) which is intended to be an FAQ document to aide with all the specific situations that may come up regarding complying with 408(b)-2 and least all the situations that they could come up with at this time...LOL.  Below is a link to the bulletin.

Among the more interesting of these FAQ's are Questions 29 and 30 which deal with Brokerage Windows and Self Directed Brokerage Accounts (SDA) in plans.  Specifically, in relationship to Participant-Level Fee Disclosure what is asked is whether Brokerage Windows and Accounts are covered under the regulation.  The short answer to this is yes, they are covered under this regulation. 

However, in my best layman's terminology, what it says is that the SDA window must properly provide disclosure of all potential fees that may exist in that investment structure, but NOT the underlying investments held inside the account.  I.E. The SDA is not considered a Designated Investment Alternative (DIA)

Ex.) If there is an Administrative Fee - like $1000/year or if there are transaction fees, those must be made available for the participants, but if the participant invests in a mutual fund inside the window, that mutual fund doesn't necessarily need to separately comply with the disclosure rules.

Seemingly, this could create a loophole of sorts.  Like having a plan exclusively investing in SDAs and then investing in securities within those windows without any fee disclosure compliance for those securities.....not so fast!!!

In Q30 of this bulletin, what it says is that if a "significant number of participants and beneficiaries" invest in the same underlying security within the brokerage window, that this security would be considered a DIA and be subjected to the 404a-5 Fee Disclosure rules.  So this begs the question, what is the definition of "significant number"?  Later on this bulletin they reference 5 participants or at least 1% of the participants (for plans w. more than 500 participants) as that number.

Based on this stipulation, it led me to consider the following questions.

Q1.) If the uptake at the participant level for the brokerage window is 4 participants or fewer, are we to assume that the DIA questions in the SDA would be a moot point b/c of the reference to five participants or more?

A1.) More or less, yes, although not necessarily moot.  A Plan Sponsor will still need to monitor this and ensure that it is less than five and that in general Prohited Transactions are still being prevented.

Q2.) If the answer to the first question is yes, only worry at five or more, what type of SDA examination procedures needs to be put in place to ascertain whether commonality of holdings exceeds the 5 participant or more threshold? If it does, how does a Plan Sponsor gain proper 404a-5 coverage if that holding is an individual security?

A2.) Theoretically, procedures could be established to monitor these accounts looking for and observing any commonality of holdings.  However, from a practical perspective who is really going to do this?  Certainly not most Plan Sponsors, and it seems a daunting task for any administrative professional to do it either.  It would seem especially difficult in scenarios where the participants aren't in a window, but rather are using their own brokers at different broker dealers. 

DOES THIS MEAN THAT SDAs ARE EFFECTIVELY......DEAD MAN WALKING??  Time will tell, but our interpretation is that yes, for any plan of size with many SDAs, they are no longer practical to have.

Q3.) If the Plan Sponsor does have that policy in palce to properly monitor these (LOL), what happens when the security is an individual stock or bond (ex., Facebook Stock).  How does the stock provide a 404a-5 disclosure? 

A3.) Not likely to happen or be done correctly. 

Q4.) If this 5 or more rule is a rule, what can a firm do to put a policy in place to keep it at five or less without bumping against Non-Discrim. Issues?

A4.) There really is no way to put a restrictive policy in place without potentially running into Benefits, Rights, Features issues, i.e. Discrimination.

So that was a long way to go for this author to conclude the following opinion.  The new Participant Fee Disclosure rules, Rule 404a-5, has effectively mitigated the usefulness of the Brokerage Window in ERISA plans. 

Personally, that makes me happy on some level.  Now we'll see if this is what actually happens over time.