Anyone using the BrokerageLink® account within the Intel 401(k) may have received a letter from Fidelity in the past few weeks. The letter is a notice that certain investments are no longer eligible to be held in the account. As a result, any current holdings in these investments must be liquidated. Let’s take a look at Fidelity’s change in policy.
What’s the change?
In what appears to be an abundance of caution, Fidelity is removing ‘Limited Partnership’ ETFs from their list of eligible funds in the BrokerageLink® account. These LP ETFs are typically MLP, which invest in oil and gas pipelines, or Commodity ETFs.
These funds, while not doing so in the past, could generate what is called UBTI (unrelated business taxable income). And since the purpose of 401(k) and other qualified retirement accounts is to defer taxes, any investment generating UBTI is counterproductive to this endeavor. According to Fidelity, “UBTI can create a taxable event for the Plan requiring the Plan to file a tax return and to pay an income tax on those earnings.”
These funds are now restricted from being traded in the account. If you currently own any funds classified as LP ETFs they would have been listed on the second page of the letter from Fidelity.
What do I need to do?
So, if you currently own one of these funds what are you to do? Fidelity requires you to liquidate the holdings, but you have until December 11, 2015, to do so. To sell the funds simply log into your BrokerageLink® account like normal and place the trade to sell the affected fund(s).
If you haven’t sold the funds by December 11th “Fidelity Investment will begin liquidating the holdings and transfer the proceeds to your BrokerageLink® core cash account.”
Additionally, Fidelity is waiving the trading commissions on these funds. They state that the trades may initially have a commission charged, but it will be credited back to the account by February 29, 2016.
What are my options?
What now? What are your options after selling the affected fund(s)? You essentially have three options:
- Eliminate the allocation
- Select a replacement fund
- Hold the same fund in a different account
Eliminate Under this scenario you don't replace the exposure from the sold fund and simply deploy the cash into one of the other funds you already own. This may be an acceptable strategy if your allocation to the liquidated fund was over your target, however if you thought the position was worth holding before chances are it should remain so now.
Replace Here you can look for a replacement fund that is not affected by the new restrictions placed by Fidelity. For example, one of the funds affected is the Powershares Commodity ETF (Ticker: DBC). A potential replacement would be to buy a mutual fund that gives you the same type of commodity exposure.
Different Account Lastly, if you are using an asset location strategy (minimizing taxes by placing the least efficient investments from a tax perspective in your tax-deferred accounts), you can simply hold the fund in one of your other accounts, like an IRA. Using the PowerShares Commodity fund example, you might sell it from your BrokerageLink account and then buy it in your IRA account. Similarly, you would sell something in the IRA to then own in the BrokerageLink account.
If you are a client of Cordant, there is no action needed on your end. We will assess the best option for your accounts and will trade on your behalf prior to the December deadline.
If you are not a client, we hope this quick overview of the changes to the Fidelity BrokerageLink account is helpful. If you’d like more information on how we help our clients navigate their investment options, plan for retirement and actually get retired, please get in touch at [email protected].