Magazine article The CPA Journal

RPA | Self-Directed Brokerage Accounts Expand Fiduciary Liability

Magazine article The CPA Journal

RPA | Self-Directed Brokerage Accounts Expand Fiduciary Liability

Article excerpt

Participant-directed 40i(k) plan investment has expanded from an investment menu to include a self-directed brokerage account option. Service providers market these accounts to provide participants access to a large universe of mutual funds, stable value portfolios, and individual securities. Nevertheless, these self-directed accounts customarily include higher share class expense funds available to retail investors than those that have been negotiated by the plan sponsor or advisor for the plan's investment fund menu. 401(k) plans, however, generally include larger pools of assets than that held in the average retail investor's account. Stewards of larger pools of assets are required to secure lower expenses and monitor fund performance on behalf of their beneficiaries and participants.

Fund Selection and Retention Duties

The distinction between personal investments and 40i(k) account investments is that 40i(k) accounts receive favorable tax treatment and consequently are subject to rules, including the need to minimize the risk of large investment losses, the requirement to use plan assets to pay reasonable fees, and the duty to monitor fund performance. Plan fiduciaries have an obligation to prudently select the investment vehicles made available to participants. They also have the residual obligation to periodically evaluate the performance of these investment vehicles to determine whether they should continue to be offered as participant-directed options.

It is unclear whether a plan sponsor has an obligation to monitor all of the investment vehicles in the very large universe made available in a self-directed account. It is also unlikely, however, that a plan sponsor would not be subject to federal pension law's prudent fund selection and retention duties with respect to the mutual funds made available in such an account. Furthermore, if a plan's investment policy statement scope specifically excluded self-directed accounts, it would not mitigate the plan sponsor's duties of loyalty and prudence relating to fund selection and retention.

Restoring Plan Losses

Federal pension law entitles a participant to restoration of losses resulting from a fiduciary's breach in duty, arguably including the failure to monitor self-directed account offerings. A fiduciary in breach may also be required to pay a monetary sanction equal to 20% of the loss.

A claim would allege that the plan sponsor used plan assets to pay unreasonable compensation as it offered the self-directed brokerage account option. Plan sponsors are plan fiduciaries and determine which investments are made available, including whether to offer self-directed brokerage accounts and automated investment advice services.

A 401(k) lawsuit targeting investment advice and self-directed brokerage accounts was recently brought against Fidelity Management Trust Company (Fidelity) based on the premise that Fidelity is a plan fiduciary because it selects which share classes are made available in the self-directed accounts, thus exercising discretion over plan asset investment (Fleming v. Fidelity Management Trust Co. et al, D. Mass., No. I:i6-cv-i09i8). The lawsuit alleges that Fidelity breached its fiduciary duties by receiving unreasonable compensation from the higher-expense mutual funds it made available through self-directed brokerage accounts at the expense of plan participants. It further alleges that retail classes of shares were offered when institutional shares existed for the same funds and that self-directed accounts constitute one institutional account. …

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