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Self-Directed Brokerage Accounts - The Sequel


In a recent two-part blog series I described how Self-Directed Brokerage Accounts (SDBAs) do more harm than good within a well-designed 401(k) plan program. Of course, Murphy’s Law, just after I reviewed the recently revised Department of Labor guidance on SDBAs, the guidance changed again. This warrants a brief update to: (1) discuss the DOL’s changes to their changes, and (2) re-emphasize that the dim view I take on offering SDBAs within a 401(k) plan remains exactly the same, for the same essential reasons as before.

What Has Changed (This Time)?

Our story begins when the DOL issued its May 2012 Field Assistance Bulletin No. 2012-02. “FAB 2012-02” indicated that investments available inside an SDBA might need to be treated as designated investment alternatives (DIAs), without the plan fiduciary ever having designated them as such. This opened up the possibility that plan sponsors could be responsible for identifying, monitoring and disclosing performance information on investment vehicles they never meant to designate in their plans to begin with.

In my June 2012 blog, I reviewed the arcane guidelines indicated by FAB 2012-02.  It appeared that plans with more than 25 separate investments (sponsor-selected DIAs plus participant-purchased SDBA investments) may have needed to treat some or all of the participant-purchased SDBA investments as DIAs – with a few additional confusing caveats thrown in for good measure. 

Not surprisingly, the DOL’s bulletin created quite a commotion in the financial industry. There was so much fallout that, shortly after I posted my blog on the subject, the DOL released its July 30 “FAB 2012-02R,” superseding FAB 2012-02. In this follow-up bulletin, the DOL is now considerably more direct in answering whether a plan’s SDBA selections need to be regulated as a DIA: No, they do not.

Different Details, Same Conclusion

Thus, while a few of the particulars have changed, my recommendations remain unchanged. I still think SDBAs serve no useful role in 401(k) plans. The goal is to provide plan participants with durable solutions that support the stamina they need to select and maintain an investment portfolio aligned with their personal retirement goals and risk tolerances. SDBAs, in contrast, seem to operate more like gambling casinos where hope reigns over reason.

Moreover, there’s reason for plan sponsors to remain vigilant of SDBAs. Even though the DOL may have relaxed its guidance, others may not be so laid back if the SDBA experience proves disappointing for participants. As a recent Forbes article points out, “The regulatory threat won’t go away if folks like Jerome Schlichter, a plaintiff lawyer who makes his living suing employers for excessive 401(k) fees, have anything to say about it. A brokerage window [SDBA], he argues, ‘throws people into the Darwinian world of investments and eliminates the whole advantage of having a fiduciary’ that ‘reviews and vets the funds’ offered to workers.”

In addition, as Marcia Wagner of The Wagner Law Group notes, “It [the DOL] still correctly maintains that the offering of the window should be held to the fiduciary standards of general prudence, which is reasonable.” (“DOL Does Turnaround, Backs Off Controversial Brokerage Window Provisions,” InvestmentNews, July 30, 2012)

In other words, fiduciary prudence remains the watchword of the day, and rightfully so. Where the DOL has tried once to extend this prudence into the realm of SDBA oversight, it could try again. Which circles me directly back to my initial conclusion, which bears repeating here: Offer your participants the tools they need to invest for their retirement in a sensible way, and they should not miss the complexities of the SBDA.

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