My Bias against self directed brokerage accounts in 401(k) plan

Just like the thought of traveling to Dubai with a passport that says “Ary Rosenbaum”, I have a general uneasy feeling about the use of self directed brokerage accounts within 401(k) plans. While it’s still allowed, I have some liability concerns with plans offering them. Choice can be a good thing with a 401(k) Plan, but too many choices aren’t  a good thing. The problem I find with brokerage accounts is three fold.

1)   Plan sponsors actually need to vet brokerage account providers, as well as providing investment education and/or advice to those who partake in these accounts. I don’t think any hold harmless agreements by a plan participant who invests in these account will do any good because a plan sponsor has a fiduciary duty to all plan assets. It also doesn’t help that plan participants who use brokerage accounts do worse than participants who use the plan’s core fund lineup.

2)   While most of these firms who offer brokerage accounts are professional services organizations, many tend not to offer it to all participants (which can bring up plan discrimination as it pertains to benefits, rights, or discrimination). I once belonged to a 401(k) plan where the partners had brokerage accounts, but associates and staff weren’t given that option. Sorry, Pat.

3)   Whether it’s through litigation or regulation, I think there is a lot of unsettling fiduciary liability issues that may come up further down the pike where plan sponsors will regret offering brokerage accounts.

Just my two cents and my bias against participant directed brokerage accounts within 401(k) plans.

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