Individual Brokerage Accounts in plans? DOL says “nyet!”

(Yet again, an arcane topic – but that’s the nature of this highly regulated business.  But this is of vital importance to a narrow segment of plan sponsors.)

OK, so the Department of Labor has been coming out with more and more regulations on participant-directed accounts, and how fees have to be disclosed better (and with some good reason, as there is a lot of money sloshing around and being siphoned off of these accounts without much knowledge and disclosure).  But the well-intentioned rules are onerous, to say the least!  All kinds of details on investment options are required, expenses, performance, categories, etc.  So, what if you just let everyone do whatever they want, more or less?  You can’t possibly prepare disclosures for hundreds of investment options, right?  Well, right, to a point – in the “final” regs last updated in 2011 and effective July 1, 2012, the DOL said yes, you just had to make sure the basic account fees and rules were explained, but you didn’t have to go into details on the many, many choices that are available in an open-ended account.

But hold on – on May 7, 2012, the DOL issued a Field Assistance Bulletin (FAB 2012-02) that effectively re-writes the rules (at the last minute, no less) – Q&A 30 says that while each of the many options in these accounts does not require the detailed disclosures, sponsors must provide disclosures on at least three, or if any five participants choose the same fund, on those funds as well.  I guarantee that the types of sponsors who are offering these accounts are not in a position to prepare these disclosures!  (We’re not either.)

Why are they cracking down on these accounts?  The following sentence from Q&A 30 is instructive: “As the Department explained in the preamble to the final regulation (75 FR 64910), when a plan assigns investment responsibilities to the plan’s participants and beneficiaries, it is the view of the Department that plan fiduciaries must take steps to ensure that participants and beneficiaries are made aware of their rights and responsibilities with respect to managing their individual plan accounts and are provided sufficient information regarding the plan, including its fees and expenses and designated investment alternatives, to make informed decisions about the management of their individual accounts.”  In other words, it’s not good enough any more to say “I don’t care what you do – go for it.”  Trustees must provide enough information for participants to manage their accounts (and must also monitor investment choices).  Plus, the fact that some investment people were out there saying “the way to get around the disclosure rules is to set up individual brokerage accounts” didn’t help (pigs get fat, hogs get slaughtered).

What to do?  Honestly, I don’t have a good answer at the moment.  It’s easy enough to say you just have to use a platform with a limited menu of funds and coordinated recordkeeping and reporting, but there are steep costs.  We’ll be contacting our clients individually.  Stay tuned…