The Form 5500 filing season is behind us, but self-directed brokerage accounts haven’t gone away. And neither have the issues Plan Sponsors need to deal with.

I wrote about self-directed brokerage accounts ten years ago. They’re still around, and so are many of the same issues employers need to consider when offering them.

What Is a Self-Directed Brokerage Account?

A Self-Directed Brokerage Account, or SDBA, allows a participant to invest some or all of a retirement plan account outside the Plan’s regular investment menu.

At the time of my earlier article, I noted that the driving force behind adding an SDBA was often a business owner or important executive with a large account balance who wanted investment choices beyond the Plan’s regular menu.

And those participants have, as we say in Chicago, clout.

Ten years later, the investment choices have changed. The basic issues for employers haven’t.

More Choice Requires Limits

SDBAs aren’t necessarily a bad Plan feature. For sophisticated participants, access to a broader universe of investments can be attractive.

But there’s an important distinction between giving participants investment discretion and giving up Plan oversight.

A brokerage window can give participants access to hundreds or even thousands of investments beyond the Plan’s regular investment menu. That doesn’t mean every investment available through the brokerage platform has to be available through the Plan.

The employer should determine what types of investments will be permitted, whether any should be restricted, how much of a participant’s account can be invested through the brokerage window, and whether access will be available to all participants.

Those decisions should be intentional, not simply whatever the brokerage provider happens to permit.

Start With the Plan Document

Does the Plan document permit self-directed brokerage accounts? Who is eligible to use them? Can the entire participant account be transferred to the SDBA, or only a portion?

Then look at the actual operation of the Plan. What does the recordkeeper permit? What does the brokerage provider permit? Are those provisions consistent with the Plan document and the employer’s intentions?

The answer shouldn’t be, “We’ve always had it.”

Understand the Fees

The participant may choose the investments, but the employer selected the Plan’s service providers and approved the brokerage arrangement.

What does the brokerage account cost the participant? What compensation does the provider receive? Are there other fees or compensation associated with investments available through the brokerage window?

For the employer, the practical point is straightforward: understand who is getting paid, how much they are getting paid, and why.

Put It in Writing

The employer should have a documented process for how the SDBA fits within the Plan. That process might address who can use it, how much can be invested through it, restricted investments, fees, participant disclosures, and responsibility for reviewing the brokerage provider.

Whatever is put in writing should reflect how the Plan actually operates.

Review the Plan

Plan provisions have a way of becoming part of the furniture. Someone made a decision years ago. The provision was added. Participants used it. And unless something went wrong, nobody had much reason to revisit it.

An SDBA shouldn’t be treated that way.

The Plan Review should include the brokerage window. Does it still serve its intended purpose? Are the fees reasonable? Are the investment restrictions still appropriate? Have new types of investments become available? Do the Plan’s written provisions and procedures still match actual operations?

Those are not questions that should wait until there is a problem.

The Takeaway

Self-directed brokerage accounts can be a valuable Plan feature. They can provide participants with investment flexibility well beyond the Plan’s regular investment menu.

But self-directed doesn’t mean the employer should stop paying attention.

Establish the rules, understand the fees, document the process, and include the SDBA in the Plan Review.