Off the Hook?

Do self-directed 401(k)s relieve trustees of fiduciary responsibility? StaffAugust 17, 2001

Q: Our company is considering changing to a 401(k) that allows for self-direction by participants of funds. The trustees believe this will relieve them of fiduciary responsibility. Does it?


A: Self-directed accounts, or brokerage links, are becoming very popular options in defined contribution plans today. Whether or not they completely absolve plan sponsors from fiduciary responsibility is highly debatable.

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Brokerage links open a world of investments to participants. They are no longer held to 10 or 20 investment choices. Through these tools, a participant can technically invest in any fund and any stock they want. Plan sponsors believe these devices leave the investment decisions squarely in the lap of the participant therefore removing them from fiduciary responsibility.

For example, a Fortune-500 company we work closely with offers more than 3,600 mutual funds as well as access to individual stocks and bonds through a brokerage link. The marketing literature which participants received when the brokerage link was rolled out referenced the brokerage link “may be appropriate if you are willing to be exposed to additional investment risk and if you are prepared to take on additional responsibility of more closely monitoring this portion of your portfolio.” In addition, the information cautions it is always “your responsibility to ensure that the investments you select are consistent with your goals.”

However, because the investment choices are virtually unlimited within these brokerage links — and are not simply 10 or 20 funds — we believe the plan sponsor has even more responsibility to help educate participants on how to properly allocate their retirement plan assets. If the plan sponsor is not going to provide the education it is wise to seek the advice of an unbiased, third-party adviser.

Lynn Allen, CRPC, Vice President
The Scarborough Group

See previous “Ask the Experts” columns:

Revenue Recognition under SOP 81-1

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U.S.-U.K. Tax Treaty

Paperwork for Customers in Tax-Free States

Licensing Fees in Japan

Software Leasing

Buy-out Legal Fees and Treasury Stock

A Merger Accounting Scenario

Use Tax

A FAS 133 Example

Leasing Accounting

Goodwill Taxing

Recognizing Upfront Fees

Proving Tax-exempt Status

The ABCs of OECD

Credentials for Credit

Big Five Audits and Venture Funding

GAAP for Private Firms

Transfer-Pricing Guidelines

Insurance for E- business Infrastructure

401(k) Brokerage Links

Navigating the Rough Waters of Sales Tax

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