DOL set to take a look at 'brokerage windows' in 401(k) plans

Department wants to make sure investors are protected when given more latitude in picking investments

Jan 22, 2014 @ 12:00 pm

By Mark Schoeff Jr.

The Labor Department is poised to take a closer look at whether investors are protected in company retirement plans that enable employees to go beyond the plan's menu to choose investments.

The department is scheduled to release a request for comment in April on so-called brokerage windows in 401(k) plans. The mechanisms provide a way for workers to select investment vehicles that are not offered offered in the plan.

In 2012, the DOL addressed concerns about brokerage windows in two Field Assistance Bulletins. But the answers to the frequently-asked-questions posed in the documents generated more questions in the financial industry.

The comment solicitation is the first stage in a “rule-making project” that will focus on the “fiduciary obligations and regulatory safeguards” surrounding brokerage windows, according to the DOL, which put the topic on its regulatory agenda for the first time.

“This is potentially the beginning of a regulatory effort on brokerage windows that could be very broad and significant,” said Bradford Campbell, counsel at Drinker Biddle & Reath and a former DOL assistant secretary for the Employee Benefits Security Administration. “It is one of the surprises on the regulatory agenda. They're sticking their toe in the water.”

Plan sponsors are looking for more guidance on the use of brokerage windows, according to Timothy Kennedy, a partner at Montgomery McCracken Walker & Rhoads. There are questions about disclosures as well as whether a registered investment adviser has to be hired to help participants.

“It's a little unclear out there the fiduciary framework for brokerage windows,” Mr. Kennedy said. “Right now, people are doing their best. A more clear process would help plans.”

Harold Anderson, president of Parkshore Wealth Management, supports brokerage windows because they benefit clients who work for companies that provide limited investment options in their 401(k) plans. One large California employer, for instance, doesn't offer emerging market, real estate or small-cap value options.

“It allows the person to go out, especially working with a good adviser, and build a portfolio that's really adapted to their needs and risk tolerance,” Mr. Anderson said. “It's more custom to them.”

The efficacy of brokerage windows depends on who's using them, said Neal Solomon, managing director of WealthPro.

“When you get into something that is self-directed, all the risks and rewards that come with somebody having complete control of their own investment decisions comes into play,” Mr. Solomon said. “The individual participant may or may not be sophisticated as an investor.”

The brokerage windows need to have some kind of safeguards, Mr. Anderson said.

“You don't want people to lose their life savings,” Mr. Anderson said. “I think it's good to have some kind of warning light to say, 'Get an adviser,' or understand that the investment choices you make may not be as good as the investment choices the plan trustees have made on your behalf.”

Brokerage windows are not widespread. In 2012, they were offered in 17.1% of 686 401(k) plans surveyed by the Plan Sponsor Council of America.

“It's more of a niche in the industry,” said Robert Kaplan, national retirement consultant at ING U.S.

The focus on brokerage windows reflects the DOL's concern that plan participants are on their own if they opt to use the mechanism.

“They may make their decisions on emotion rather than investment savvy; that's the Department of Labor's worry,” Mr. Kaplan said.

Even when a brokerage window is included in a retirement plan, its use may be limited. The Employee Benefit Research Institute has included the mechanism in its plan for more than a decade.

“Over all these years, I'm the only one who's used it,” EBRI chief executive Dallas Salisbury said.

But he said that it is an important part of EBRI's retirement program for its employees.

“In a self-directed plan, you should allow individuals to pursue whatever [investment] fits their risk tolerance,” Mr. Salisbury said.

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