This summer, the federal Thrift Savings Plan will allow participants to allocate some of their assets to a self-directed brokerage account, or SDBA, becoming the latest large employer plan to incorporate an SDBA into its offerings.
SDBAs allow plan sponsors to keep their menu streamlined, while also alleviating specific investment demands from some participants. About half of large plans now offer SDBAs to plan participants, a share that has inched up slowly over a couple of decades, although less than 3% of participants in a given plan make use of the brokerage window, according to Alight.
These accounts have historically been found mostly in plans of professional services firms, such as doctors or law practices, where a small but important segment of an employee population wanted access to more sophisticated and diverse investment options than were available in the core menu.
Growth in SDBAs in recent years, however, has also come from plan sponsors looking for ways to offer certain types of investments that some participants might be asking for, such as environmental, social, and governance options, or faith-based investments. “Self-directed brokerage accounts seem to come up more now as a way to solve for more diversified needs that weren’t coming up five years ago,” says Jennifer Doss, director of institutional solutions for CAPTRUST in Raleigh, North Carolina.
SDBAs are also an option that some plan sponsors use to keep retirees or those who have separated from the company from taking their assets with them. “Plan sponsors would rather these folks stay in the plan now,” says Michael Kreps, a principal at Groom and the co-chair of the firm’s Retirement Services Practice Group. “They work really hard to get the fees down and to make the plan work for more people, so they want to limit the outflow. Participants can always come out of the investment window, but once they’re out of the plan, they can’t come back.”
Another factor that drives interest in SDBAs is a recent merger or acquisition, in which two companies have to merge vastly different fund lineups in their retirement plan. “In those cases, a brokerage window is a fairly palatable add to the lineup, so that participants who lost their favorite fund can go there and find that fund,” says Greg Ungerman, senior vice president and defined contribution practice leader at Callan. “That’s with the caveat that in a brokerage window, they tend not to be institutional shares, and there are no collective investment trusts, so it’s retail pricing.”
Not for Everyone
While SDBAs make sense for some plan sponsors, they’re not necessarily right for every plan, says Allie Rivera, vice president of investment and retirement services for OneDigital Retirement + Wealth. “If not having a brokerage window is creating a barrier for employees who won’t participate because of their religious beliefs, then offering a brokerage window is a solution,” Rivera says. “But on the flip side, if you have a diversified investment lineup and your participant base is satisfied, and you have high participation rates, then this might not make sense.”
In addition, SDBA fees have fallen in recent years, allowing more employers to consider whether they’re a viable option for their plan. Still, SDBAs are about three times more popular in the largest plans (those with more than 5,000 participants), at 44%, than in the smallest (fewer than 50 participants), at 15%, according to data from the Plan Sponsor Council of America.
“SDBAs have become a very low-cost tool that a lot of participants use in a meaningful way to help them achieve their goals,” says Nathan Voris, director, investments, insights and consultant services at Schwab Retirement Plan Services in Richfield, Ohio.
A Charles Schwab report found that at the end of last year, the average participant balance in an SDBA was about $353,000, up 6.4% over the previous year. That balance was significantly higher at $558,470 for advised accounts, than for non-advised accounts ($304,164). “The self-directed brokerage account is a great tool for a 401(k) participant who has an adviser who can provide direction on using it and make that part of their overarching strategy,” Voris says.
For now, most plan sponsors aren’t making advisers available specifically for the brokerage window. They either have just the standard advice component that they offer to every plan participant or participants using SDBAs are conferring with their outside advisers.
To Limit or Not to Limit Investment Options
Advisers say the best structure of an SDBA will depend on its size, the objectives of the plan, and the needs of participants. If a plan sponsor does offer an SDBA, all participants must have access to it. Voris says some plan sponsors do a proactive survey of plan participants before introducing an SDBA to gauge interest and get a sense of whether it’s a feature that participants would use.
Six in 10 plans don’t put any limitations on the investment options within the SDBA, while 31% limit investments to mutual funds only and 9% limit to only mutual funds and exchange-traded funds, according to Alight. Another restriction that some sponsors impose is not allowing participants to purchase the retail-priced shares in a mutual fund that the plan offers at a lower price, Ungerman says.
Among the participant assets in SDBA plans, equities remain the most popular asset, comprising 37% of holdings. Mutual funds were the second-largest holding, at 30%, followed by ETFs at 21% and cash at 11%, according to Schwab. Just 1% of investments in SDBA were in fixed income at the end of 2021.
Beyond limiting investments to funds only, Doss says best practice is not to place too many limitations on the accounts, since too many restrictions cross the line for making the account into a designated investment option.
“Most practitioners take the position that the employer has fiduciary responsibility to select the investments available under the plan,” Kreps says. “But with respect to [a brokerage] window, the employer as a fiduciary has only the responsibility to prudently select the provider of the brokerage window, but not the underlying investment.”
Choosing a Provider
Voris says plan sponsors introducing an SDBA now should look for an experienced provider that can walk them through the process and help them communicate it to participants. “It’s a pretty well-worn path,” he adds. “It’s not the Wild West. There are tools and resources that can help an engaged participant build a diversified portfolio.”
Like other elements of a 401(k) plan, sponsors need to follow a diligent process when introducing the SDBA. “You just want to make sure that you are thinking about it during the recordkeeper selection process, and make sure that you understand the fees and how it’s going to be communicated to participants,” Doss says.
Fee compression and growing awareness of diverse participant base needs may continue to drive interest in SDBAs.
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