I am not a big fan of participant directed brokerage accounts within self directed 401(k) plans because it can lead to a whole host of issues and problems that plan sponsors may not anticipate. So while I’m not a big fan of this option within 401(k) plans, I will let my clients and the advisors I work with to decide whether to add this option or not.
Thankfully, the Department of Labor (DOL) reined themself in after coming up with a Field Assistance Bulletin that should have had any plan sponsor that offered a self directed brokerage account a lot of heartburn.
Back in May, the DOL took the position that, in some cases, plan fiduciaries have a duty to investigate how participants were investing in individual brokerage accounts. Basically, the DOL said that, if there are similar investment patterns among participant individual brokerage accounts, it was possible that those similar investments would need to be treated as designated investment alternatives and, therefore, a variety of disclosures would need to be made to all participants, including the performance history of those investments, expense ratios, appropriate benchmarks, turnover ratios, etc. This would have been a disclosure nightmare for plan sponsor and their plan providers alike.
Of course, there was backlash from plan sponsors and the rest of the retirement plan industry because this really came out of the blue because the DOL has always taken a laissez faire approach to self directed brokerage accounts, so this created an uproar.
Thankfully, the DOL listened and clarified their position, by stating that:
• Plan fiduciaries do not have an obligation to investigate and/or monitor and/or disclose the investments within individual brokerage accounts.
• Plan fiduciaries do have a fiduciary duty, under the Prudent Man Rule, to prudently select and monitor the providers of brokerage accounts and to provide the 404(a)(5) disclosures to participants about the operation and availability of the brokerage accounts, as well as the fees involved with these accounts.
So that fire is put out, what’s next?