Self-Directed Brokerage Accounts (SDBAs) have quickly become the investment of choice in today's retirement plan industry. In fact, about 20 percent of all retirement plans now offer SDBAs. What's the buzz about?

Participants hear about an account in which they can invest in basically anything under the sun. Brokers promote SDBA products to plan sponsors as the best way to alleviate fiduciary liability. If it sounds too good to be true, it very well may be.

Under ERISA section 404(a)(1)(A) & (B), plan sponsors have basic fiduciary responsibilities, two of which should directly affect their decision on allowing self-directed brokerage accounts in retirement plans. First is the duty of loyalty, more commonly known as the Exclusive Benefits Rule. Cost is an important part of the plan exclusively benefiting the participants and their beneficiaries. Higher investment transaction fees are generally a reality of self directed brokerage accounts. Additional administrative costs are also often included in SDBAs.

The second responsibility is prudence, most notably in selection and retention of investment choices. Common interpretation of investment prudence requires the plan fiduciary to review all investments available, including all SDBA investments.

How can plan sponsors allow SDBAs and still reduce their fiduciary liability involved?

• Create a plan investment policy which prohibits higher risk investments, such as partnerships, non-publicly traded stocks or real estate.
• Select one or more brokers to service as designated brokers for the plan and require all SDBAs to be invested through these brokers.
• Select brokers and service providers that can perform their duties in conjunction with one another, for example electronic reporting between the two entities.
• Educate all participants in the plan about the SDBA options and associated additional expenses.
• Monitor costs associated with SDBAs on an ongoing basis.
• Periodically review SDBA investments – either by the plan designated broker or plan sponsor.

While there is a growing participant expectation for self-directed brokerage options, keep in mind the plan sponsor has the largest risk and therefore the right to say no.

-By Jami Miles, QKA (Retirement Plan Specialist)

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