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Growing Attention Being Paid, by the IRS and DOL, on 401k Plans that Exclusively Use Individual Brokerage Accounts

By August 28, 2023No Comments

There remains significant industry attention paid to the major changes to 401k and 403b Plans in the last several years – and deservedly so:

  • SECURE 1.0 and 2.0 have improved the availability of, access to, and features of 401k and 403b plans,
  • The IRS and U.S. Department of Labor (DOL) have issued guidance which, in many cases, improves the operational efficiency and appeal for employers who maintain 401k and 403b Plans, and
  • The institutional recordkeepers – the investment firms that hold Plan accounts, offer a menu of investments, and provide the web and mobile account management tools for Plan participants – have been consolidating (through mergers and acquisitions), are more price competitive, and continuously roll-out technological enhancements to improve the Plan participant’s experience.

Somewhat lost in the shuffle has been a subtle but growing attention being paid to 401k Plans that exclusively use individual brokerage accounts rather than an institutional recordkeeper, primarily by the IRS and DOL. While ACSI continues to be a strong partner to these Plans and recognizes the significant benefits for the right client, the increased IRS/DOL attention is beginning to prompt some to ask: Does the increased risk of fiduciary liability, and the operational headaches, outweigh the potential advantages for an employer whose 401k Plan only uses individual brokerage accounts?

Operationally, it is worth considering how, and how quickly, the contributions get remitted to the brokerage account provider and allocated to the Plan participants’ accounts. This often is done by a paper check that is mailed to the brokerage account provider, with a manual process to get the funds into participants’ accounts, compared to the frequent use of ACH directly from the payroll provider to the institutional recordkeeping with simultaneous allocation and investment in participants’ accounts. The timing of contribution deposits has long been a focus of the DOL.

Additionally, the recent heavy emphasis on the optional and, in some cases, mandatory use of ROTH after-tax contributions (see adds another layer of complexity to Plans that use individual brokerage accounts. The section of the Internal Revenue Code that permits ROTH contributions requires that the Plan have separate accounts (“designated Roth accounts”) for the ROTH contributions of each employee and the associated earnings, and the employer must maintain separate recordkeeping for the ROTH accounts. As such, a Plan participant should have at least two individual brokerage accounts if any ROTH contributions are required by law or elected by the Plan participant. We believe this will be a compliance focus of the IRS in the future.

Another issue is the inability or difficulty of a participant to direct the investment of the individual brokerage account under the Plan, because the balance is small and/or the contribution activity is in amounts that make it impossible to purchase some investments or properly diversify across multiple investments. Also, the purchase-sale transaction costs and/or account management fees for small accounts often are expensive relative to the size of the account. These are fiduciary issues which frequently are addressed by the DOL.

Finally, DOL commentary and warnings on the issue of cryptocurrency investments in Plans highlight the potential fiduciary issues of Plans using only individual brokerage accounts. The DOL’s statements have been broad and indicate a fiduciary concern beyond this specific investment. See, for example, this lawyer’s article:

The recent evolution of the recordkeeper industry is such that recordkeepers are not “one size fits all” and offer a variety of features. Some of the recordkeepers with whom we work now have a linked self-directed brokerage account window, available for those who want to use a brokerage account, while those participants who are better served by not doing so have their Plan account on the recordkeeper’s core arrangement.

Please contact ACSI ( to discuss the pros and cons of individual brokerage accounts versus an institutional recordkeeper for your Plan.

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