DOL eyes brokerage windows in 401(k) plans

The agency's request for more information on the choices and disclosures available to participants could set the stage for new rule making

Aug 20, 2014 @ 11:40 am

By Darla Mercado

The Labor Department is setting its sights on brokerage windows in 401(k) plans, requesting information from the industry on the types of choices available and how much is disclosed to participants.

The DOL Wednesday released its request for information on brokerage windows — a feature of retirement plans that permits participants to access a broader range of investments beyond a given 401(k) plan's core menu and lineup of target date funds.

In its request, the DOL is calling for the public to chime in on a broad scope of questions on brokerage windows:

• Should fiduciary or disclosure standards apply to them?

• What are the benefits and drawbacks of having brokerage window arrangements in a retirement plan?

• Are there more or fewer plans offering brokerage windows, and are plans adjusting the number of designated investment alternatives they make available?

• What proportion of participants in a plan use them, and do they invest all of their 401(k) assets in these brokerage windows?

The DOL also had questions about the extent to which plan fiduciaries monitor investments made through a brokerage window and whether they have access to information on the investments that workers choose. Fees and disclosure were other areas of concern for the DOL. Check out the RFI here.

Though the inquiry is a broad one, it potentially sets the stage for rule making by the DOL.

“My suspicion is that they have concerns in mind [on] whether participants are getting the information they need to make an informed decisions,” said Bradford P. Campbell, an attorney at Drinker Biddle & Reath and a former head of the Employee Benefits Security Administration at the DOL.

“They raise a host of issues,” he added. “I think it's likely the beginning of a broader regulatory project where they look at not just the disclosure issues, but fiduciary issues and other considerations on how these are being used in plans and what it means for participants.”

Students of the retirement plan industry will know that this isn't the first time the DOL has taken a magnifying glass to the world of brokerage windows.

Back in 2012, when the Labor Department readied its fee disclosure regulations for participants, the agency released a field assistance bulletin that many interpreted as assigning plan sponsors more fiduciary responsibility for the choices workers make through a brokerage account. At the time, the DOL said that if “significant numbers of participants and beneficiaries” in a given plan opted to use an investment that isn't a [qualified default investment alternative], then plan fiduciaries ought to treat that investment as a QDIA.

At that time, employers were losing sleep over the possibility that they could be held responsible if workers selected brokerage account investments under the pretext of being sophisticated investors and ended up taking large losses. They had little time to react; the 401(k) fee disclosure rules for participant kicked in on Aug. 30, 2012, and the bulletin on brokerage windows came out in May that year.

The DOL wound up backpedaling on those additional fiduciary responsibilities on brokerage windows, dropping language that would label them as designated investment alternatives if a certain number of people chose to use them.

Craig Hoffman, general counsel at the American Society of Pension Professionals and Actuaries, said service providers' fears raised in 2012 remain valid today. The infrastructure necessary to meet tougher standards on brokerage windows would be costly.

“The issue back in 2012 was, 'What technology is out there to monitor what the participant is doing in self-directed brokerage?'” he said. “The record keepers are concerned about what it might cost to create such technology. It's not existent right now.”

Nevertheless, there's room for improvement, particularly when a brokerage window is the sole component of a plan's menu, noted Skip Schweiss, president of TD Ameritrade Trust Co.

Though workers can access mutual funds, exchange-traded funds, stocks and bonds through the brokerage window, employers can opt — and have opted — to limit it to ETFs and mutual funds, Mr. Schweiss said.

“I do worry about participants having access to individual issue securities,” he noted. “How many are really capable of doing securities analysis on their own in a 401(k) plan?”

Further, over the last two years, he has warned advisers that if they're advising plans to make their investment menus exclusively through brokerage windows, “you might want to know what the DOL thinks about that,” he said. “Understand that there are concerns that may manifest in additional regulations.”

Still, Mr. Schweiss observed that brokerage windows have their place as an option in some plans in addition to a core menu of mutual funds or ETFs.

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