Householding of brokerage accounts is a common practice. Clients like it because they can get reduced fees by aggregating all of their accounts. Broker-dealers like it because they get more assets to manage. But when retirement accounts are involved, broker-dealers need to be mindful of special rules that can adversely affect their clients…because unhappy clients don’t tend to remain clients for long.
The problem occurs under the prohibited transaction rules of ERISA and the Internal Revenue Code. They say that a fiduciary (i.e., the person in control of the account – the investor) can’t use retirement assets to obtain a personal benefit. With householding, the client gets a personal benefit when the combined value of both his or her retirement and personal accounts hits a breakpoint that reduces the fee on the personal accounts. In other words, the investor gets a personal benefit from the use of retirement assets.
The good news is that the Department of Labor (DOL) issued a prohibited transaction exemption (PTE) 20 years ago that permits the aggregation of retirement and personal accounts to achieve a discount for brokerage services. (Note that this exemption doesn’t apply to RIA services, and householding in that case remains prohibited.)
PTE 97-11 allows the value of certain retirement accounts and personal accounts to be combined in order to provide brokerage services at a reduced fee. The PTE applies to IRAs and Keogh plans (i.e., plans that cover only self-employed individuals and their spouses). IRAs are broadly defined under the PTE. They include traditional IRAs, Roth IRAs, SEP IRAs and SIMPLE IRAs, so long as the investor has the “unrestricted authority to transfer” the SEP or SIMPLE IRA to another financial institution. The one type of account that is excluded from this list is a participant’s account in an ERISA plan (such as a participant’s 401(k) account).
PTE 97-11 has several conditions. One is that the services offered to the IRA or Keogh plan must be the same as those offered to other customers with account values of the same amount or the same amount of fees generated. Also, the combined total of all fees for the provision of services to the IRA or Keogh plan can’t exceed reasonable compensation. (There are a few other conditions, so anyone seeking to rely on the PTE will need to get further advice.)
If the exemption is not available – for example, if the client’s retirement money is in a plan or the account is an advisory account – there is still a solution. And that is to avoid the prohibited transaction by applying the entire discount resulting from householding to the retirement accounts with no fee discount to the personal accounts.