Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
1, Employees want more control over their retirement investments. Small companies may want to check with plan recordkeepers about offering self-directed 401(k) accounts.
2, SDBAs allow participants to invest in stocks, bonds and exchange-traded funds, with fewer restrictions, and include lower-cost investments.
3, Consider discussing your 401(k) plan menu with a third-party fiduciary investment adviser who can help maximize your plans’ options.
4, There are risks. Individual investors tend to overestimate their degree of investment knowledge. Self-directed plans can increase the potential for principal loss.
Small business owners that offer 401(k) retirement plans to their employees might want to take a look at some new, more flexible products that offer participants more options and flexibility while not tremendously impacting the overall employer cost.
American workers are participating in the stock market at historic rates, with the majority of their money invested through their employer-offered 401(k) account. You could guess the inevitable. More employees want increased investment flexibility in how they invest their retirement accounts.
Small companies have been quick to respond to employee demands. More of them are offering the self-directed brokerage account (SDBA), which is sometimes referred to as the “brokerage window option.”
Small companies need to check with their current retirement plan sponsor and their current recordkeeper to see about adding the self-directed account to their default 401(k) menu.
The SDBA allows 401(k) participants to establish a personal brokerage account within their employer’s defined contribution retirement plan account.
SDBAs also provide retirement plan participants with more investment options, including securities outside of their company retirement plan’s core mutual fund lineup. They also allow participants to invest in stocks, bonds and exchange-traded funds, with fewer restrictions, and it includes lower-cost investment options.
SDBAs also allow retirement plan investors to choose specific stock market sectors. Think gold, oil and real estate investment options or specific stocks, like Google, Microsoft and Apple.
Self-directed brokerage accounts have been available for many years within plans directed at professional service firms, such as doctors, law firms, consultants, accountants and Fortune 500 companies.
Small companies are now seeing increased demand for these plans from their participants. They want access to a more diverse set of investment options.
The SDBA account in the company retirement plan is at the top of the list. Employees want to be able to target their investments in ways that fit their values, such as in environmental, social and governance (ESG) investment options, faith-based investments and investments that involve clean energy companies.
Retirement plan participants struggle to find investments that reflect their values and beliefs. Access to an SDBA in their retirement plan solves the problem.
They’re a bit harder to find, but even participants seeking to invest in the boom of artificial intelligence companies popping up nowadays can find what they are looking for in exchange-traded funds and individual stocks.
A final benefit of the SDBA 401(k) brokerage account option: It is a great tool for a 401(k) participant with an existing investment adviser relationship. He or she can provide investment adviser access to the SDBA account.
Or a SDBA 401(k) account can help establish a new investment-adviser relationship, providing an open door to investment advice for small company retirement plan participants.
A third-party fiduciary investment adviser analyzes the company 401(k) retirement plan menu as part of the plan participant’s financial planning strategy. The investment adviser can help make the most of the company retirement plan options.
Many small company retirement plan participants would welcome the opportunity to have a relationship with someone who can provide 401(k) investment advice to help establish a disciplined investment management strategy for their retirement account.
There are risks involved in providing the SDBA option in a small company 401(k) menu. The first is emotional. The second is financial.
Individual investors tend to overestimate their degree of investment knowledge and their tolerance for stock market risk. The SDBA 401(k) brokerage account option increases the potential for 401(k) principal loss.
The 401(k) plan sponsors might consider placing certain guardrails around SDBA investment options to mitigate some of those risks. Plan sponsors can place limits on the investments available through the SDBA.
The SDBA 401(k) can increase annual costs for a retirement plan participant. Annual account maintenance fees may apply. Trading costs apply to buy and sell securities, whether done online or through an automated telephone system.
But the SDBA option does not add more cost to the small business retirement plan sponsor.
Always check your plan’s fee disclosure documents and with your company’s retirement plan provider and recordkeeper to make sure you understand all costs associated with an SDBA account.
A final concern for the small business retirement plan sponsor: As a fiduciary, the sponsor selects investment options in their retirement plan menu.
The rules and regulations are clear, explained to me many times by my legal profession clients and volumes of Department of Labor and ERISA articles and opinions. The company retirement plan sponsor is a fiduciary, obligated to select the provider of the brokerage window and the default menu of designated mutual funds options. The company is not, however, obligated for the underlying investments made by individual retirement plan participants.
