marcia s. wagner, esq. participant advice & the brokerage window
TRANSCRIPT
Marcia S. Wagner, Esq.
PARTICIPANT ADVICE & THE BROKERAGE
WINDOW
IntroductionHecker v. Deere◦ 2,500 funds available through SBAs contribute to
dismissal of excess fee lawsuits◦ Window enabled choice of wide range of fees
2012 FAB◦ Confirms that SBA investments are not DIAs◦ SBA investments exempt form participant-level
disclosure
2014 RFI◦ Signal that new regulations in the offing requiring
more fiduciary oversight◦ Goal: protect participants using SBAs
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Definition - Self Directed Brokerage Account
SBA lets participants pick investments not on plan menu◦ Unlimited stocks, ETFs and other securities, or◦ Open mutual fund window, or◦ Limited mutual fund window geared to particular
vendor’s platform Motivation to offer SBA◦ Employee pressure◦ Employer policy◦ Desire to avoid identifying core DIAs
For now, this avoids participant-level disclosure DOL likely to close loophole
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Disclosure Requirements - General• SBA investments exempt from disclosure as DIAs ◦ No performance / benchmarking
◦ No fee information
• Disclosure required with respect to SBAs
◦ Description of how SBA works
◦ Investment instructions
◦ Account balance requirements
◦ Trading restrictions
◦ How SBA investments differ from DIAs
◦ Contact Information
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Fee DisclosuresGeneral explanation to all participants◦ Fees that may be charged against participant
accounts on an individual basis for SBA use Start-up fees Maintenance / inactivity fees Trading fees / commissions
◦ If fees unknown, notice must be provided of their existence
◦ Annual operating expenses of investment not covered by disclosure requirement (e.g.,12b-1 fees)
Quarterly fee statement◦ Dollar amounts charged to participant accounts◦ Description of related services
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Reporting RequirementsSchedule H of Form 5500 allows optional
reporting for SBA investments◦ 1 Report individual SBA assets separately
under each asset category listed on balance sheet and income statement, or◦ 2 Report SBA assets as an aggregate amount under catch-all category
Separate breakout required for certain SBA assets◦ Loans, partnership interests, joint ventures, real
property, employer securities, investments that can result in losses greater than account balance
DOL RFI signals more detailed reporting likely6
Fiduciary DutiesPrudence standard applies to SBA selection◦Gather all relevant information◦Evaluate services, costs, etc.◦Document decision-making process
Broker-dealer selection also subject to due diligence◦Confirm reasonableness of broker’s
compensationNo duty to monitor or supervise use of SBA by
unsophisticated participants
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Allocation of Expenses
General rule: fiduciary has discretion to allocate plan expenses◦Pro-rata◦Per capita
SBA expenses are generally allocated to the accounts of participants who use the SBA◦Danger of SBA subsidization by core plan
investments◦Avoid removing SBA accounts from the general
expense allocation process◦Paying service fees through revenue sharing
skews allocation of expenses
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Plan Document Authorization
Plan fiduciaries must discharge duties in accordance with plan documents
Authorization allowing participants to invest through SBA◦Explicit authorization in plan document, or◦Delegation of power to specified person or
body to authorize the SBAPrototype adoption agreements frequently fail
to address SBAsCommunicate SBA to participants
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Avoiding DiscriminationSBAs must be available on a non-
discriminatory basis◦Right to invest through an SBA is a plan
benefit, right or feature◦Current availability – mathematical tests◦Effective availability – test looks at facts
and circumstances Example: Requirement of a minimum
investment of $100,000 likely to be discriminatory, because low-paid participants will not qualify to invest through SBA
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Best PracticesSBA election form may contain protective language
stating participant responsibility for investment results
Plan sponsors should provide accurate SBA disclosures◦Advisers who assist sponsors should perform
due diligence regarding information to be disclosed
◦Adviser agreements should clearly state whether or not adviser has SBA responsibilities
Plan sponsors responsible for monitoring SBA costs
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Marcia S. Wagner, Esq.
99 Summer Street, 13th FloorBoston, Massachusetts 02110
Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com
A0129804.PPTX
PARTICIPANT ADVICE & THE BROKERAGE WINDOW