For the few defined contribution plan participants who use self-directed brokerage accounts, research shows they are older, have longer job tenure and earn higher salaries than their fellow participants.
These brokerage accounts offer investment choices to "sophisticated plan participants" and "allow sponsors to keep their core lineups simple," said Alison Borland, the San Francisco-based executive vice president for wealth solutions and strategy at Alight Solutions Inc. in her June 24 testimony before the ERISA Advisory Council, which is seeking public comment on brokerage accounts.
Among the highlights of Ms. Borland's testimony was Alight's research in 2019 that showed:
- The percentage of participants using the brokerage accounts increased by age group, topping at 3.7% for those 50-59 and drifting down to 2.9% for those 60 and older. For the 20-29 age group, only 0.4% used a brokerage account.
- Brokerage account balances rose steadily with age: the average balance was $326,460 for participants 60 and older vs. $297,340 for the 50-59 age group and $25,410 for participants ages 20-29.
- Greater use of brokerage accounts correlated with higher pay: 5.7% of participants used the accounts if their annual salaries were $100,000 or higher vs. 2.9% for those earning $80,000 to $99,999, the second-largest percentage of investors, and less than 1% for participants earning less than $40,000.
According to Ms. Borland's testimony, the percentage of DC plans offering self-directed brokerage accounts rose to 46% in 2019, up from 12% in 2001. The results are excerpted from a survey conducted every two years that is not restricted to Alight clients. The 2019 survey covered 240 sponsors with a total of 8.5 million employees and more than $725 billion in retirement account assets.
A separate Alight study of DC plan activity, published in 2021 and covering 100 clients with 3 million eligible participants, found that only 2.4% of participants used the brokerage accounts last year compared with 2.2% in 2019 and 2.3% in 2018.
A study by Vanguard Group Inc., Malvern, Pa., showed that 20% of the firm's record-keeping clients offered self-directed brokerage accounts last year. These plans served 33% of the 4.7 million participants covered by Vanguard.
This Vanguard research report, published in May 2021, said only 1% of participants who were eligible for a brokerage account, invested in it. Vanguard found that the median age of brokerage account users was 50 vs. a median age of 44 for all Vanguard participants. The median tenure of brokerage account users was 14 years vs. a median age of 7 years for all Vanguard participants.
The median brokerage account balance was $264.049 vs. the median Vanguard account balance of $33,472, a difference that the Vanguard report called "striking."