caution4A recently filed lawsuit rekindled some old concerns about self-directed brokerage accounts. What are they? Let’s start at the beginning.

Self-Directed Brokerage Accounts or “SDBAs” is the name the retirement industry has given to individual participant brokerage accounts maintained either on a stand-alone basis or through the 401(k) provider handling the menu of funds.

The driving force is usually a business owner or an important executive with a large account balance who wants to go beyond the fund menu. And those participants have, as we say in Chicago, clout to make it part of the 401(k) plan.

The lawsuit in question is Fleming v Fidelity Management Trust Company which was filed by a group of participants in the Delta Airlines, Inc. retirement plan against Fidelity alleging breach of fiduciary responsibility for excessive fees charged to their brokerage accounts.

Excessive fees are always a concern. What makes SDBAs different – and there is no nice way to say it – are all the problems a participant can cause by making investment decisions that:

  1. Are not in accordance with the documents and instruments governing the Plans;
  2. Jeopardize the plan’s qualified status;
  3. Result in a prohibited transaction;
  4. Result in Unrelated Business Income Tax
  5. Cause a loan or distribution to be made from the plan;
  6. Make an investment in any property, the fair market value of which cannot be readily determined on a recognized market or otherwise requires an appraisal;
  7. Invest in tangible personal property characterized by the Internal Revenue Service as collectibles, other than U.S. Government or State issued gold and silver coins; and; or
  8. Cause the plan to not be in compliance with State or Federal securities laws and regulations.

A plan sponsor can build in all these “shall nots” in their Investment Policy Statement (assuming that they even have one) but sometimes participants do what they do. And that can keep a plan sponsor up at night.

Picture Credit: Jacquie1948 via Flickr