The Labor Department recently requested in-formation from the 401(k) industry on brokerage windows, signaling that it may be ready to pursue rules that would clearly address the responsibilities of plan sponsors and advisers as to these retirement plan options.
Brokerage windows, or self-directed brokerage accounts, allow participants in a 401(k) plan to go beyond the menu of mutual funds, target date funds and money market funds that most plans offer. Those who select these accounts can theoretically invest in any financial product in the marketplace, including stocks, bonds — even options — although most employers limit choices.
Inherent in the idea of a self-directed brokerage account is that the plan participant is now taking on much more responsibility for his or her investment decisions. Some welcome that but others are not so sure.
FIDUCIARY ROLE
Among the questions the DOL is asking the public to comment on are whether fiduciary or disclosure rules should apply to these accounts, whether they are being monitored by plan fiduciaries and whether the fiduciaries even have access to information on the investments workers are choosing.
Clearly, the DOL is concerned that these accounts might backfire on the investors who use them. Instead of helping employees gain the maximum performance out of their retirement dollars, workers could end up with large losses if they choose the wrong investments. That is precisely why many advisers in the retirement space don't recommend brokerage windows. They are concerned that most employees simply do not have the expertise to choose their own investments, especially in an account as important to their future as a 401(k).
If the DOL ends up issuing rules regarding brokerage windows, plan sponsors are rightly worried that they could be held accountable for the decisions of workers, even though they had little control over their investment options.
Plan advisers need to make sure they and the plan sponsors with whom they are working take advantage of the opportunity to have their voices heard on this matter. Once rules are promulgated, it will be too late to complain.
