401(k) Plan Brokerage Windows Get a Reprieve


By Joanne Sammer and Stephen Miller, CEBS August 2, 2012

Last updated on Jan. 23, 2014

Update: DOL to Revisit Brokerage Windows

The Department of Labor (DOL) is scheduled to release a new request for comment in April 2014 on brokerage windows in 401(k) plans, reports Investment News, which said the focus on brokerage windows reflects the DOL's ongoing concern that plan participants are on their own if they are provided with, and opt to use, this option.

As noted in the SHRM Online story below, 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.

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

The use of self-directed "brokerage windows" in defined contribution retirement plans came under intense scrutiny in light of guidance issued on May 7, 2012, by the U.S. Department of Labor (DOL) that would have subjected the windows, and the funds available through them, to vastly expanded reporting requirements. But on July 30, 2012, the DOL dropped the controversial language that would have classified certain funds selected through a window as "designated investment alternatives" subject to a wide range of regulations, including new fee disclosure requirements, if a certain number of people elected to use them.

The retreat followed strong pushback against the original guidance by plan sponsors and service providers. However, the DOL reiterated that, under the Employee Retirement Income Security Act (ERISA), plan fiduciaries have a duty of prudence and loyalty to participants who use a brokerage window—including taking into account the nature and quality of services provided. Moreover, if their plan offers a brokerage window, plan sponsors should be aware that there are specific fee disclosure requirements for these arrangements, described later in this article.

Brokerage Windows' Growth Spurt

A brokerage window is a trading platform that allows individual participants in a defined contribution plan to buy and sell a wide range of investments, in some cases from among thousands of funds and securities, depending on how the window is structured.

A survey of defined contribution plans across a variety of sizes and industries by consulting firm Aon Hewitt showed that 29 percent offered a self-directed brokerage window in 2011, up from 18 percent in 2007. The bigger the plan, the more likely the option.

History of a Controversy

Under the DOL's participant fee disclosure rule, Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans,by Aug. 30, 2012, plan sponsors must disclose plan facts and investment fees to participants. By Nov. 14, 2012, plan sponsors must issue the first of required quarterly statements of fees deducted from individual accounts.

The brokerage window controversy erupted when, on May 7, 2012, the DOL issuedField Assistance Bulletin (FAB) 2012-02, which, in Question 30, indicated that plan sponsors have a greater fiduciary responsibility toward investment options available through a brokerage window than many had previously assumed.

Even if the plan sponsor, as fiduciary, did not designate the brokerage window or any of the funds available through it as "designated investment alternatives" (DIAs) under the plan, the bulletin stated that for windows that offered 25 or more investment options, plan administrators would have to make required disclosures for at least three of the investment alternatives on the platform that met the "broad range" requirements under ERISA section 404(c). Disclosures would also have to be made for investments in which at least five individuals (or, in the case of a plan with more than 500 individual accounts, at least one percent of all participants and beneficiaries) were invested.

Investment options available through the window that met the above criteria were to be treated as DIAs under the plan, which would have meant, among other things, providing fee disclosure information about these investments to all plan participants.

Pushback from Sponsors and Administrators

The uproar was immediate.

After FAB 2012-02 was released, there was considerable pushback from plan sponsors and recordkeepers concerned about the administrative complexity of complying with additional requirements involving brokerage windows. These concerns focused on the additional costs associated with the system changes and administrative time that would be required to comply with this part of the participant disclosure regulations.

“These new disclosure rules would require additional programming by recordkeepers and plan sponsors as they face the need to monitor brokerage usage and work with vendors to disclose this information,” the cost of which might be passed on to plan participants, said Robyn Credico, defined contribution practice leader at Towers Watson in Arlington, Va., after the initial guidance was released.

“Some plan sponsors have put in a brokerage window for the handful of people who are sophisticated enough to want to make their own decisions,” Credico added. “What these proposed rules are suggesting is that plan fiduciaries now have to monitor the use of each of the investment options in these windows, which was never the intent (of fiduciary rules). A plan could have more than 5,000 mutual funds available through these brokerage windows.”

The Society for Human Resource Management (SHRM) was part of a coordinated effort to educate agency and congressional staff regarding implementation challenges and concerns with the regulatory process that took place surrounding these issues.

Unexpected News

Extending the fee disclosure regulations to include brokerage window investments was unexpected by plan sponsors and recordkeepers, particularly the inclusion of language that stated that they had a fiduciary duty to monitor participants' selection of options available through the window. “That is absolutely new ground,” said Ed Ferrigno, vice president of Washington affairs for the Plan Sponsor Council of America in Washington, D.C. “And surprise is always unwelcome.”

Some in the industry were just as concerned about the process the DOL used to introduce the brokerage window requirements as they were about the issues that the requirements raised. Ferrigno noted that this addition came into place outside of the usual rulemaking process. “We have asked (the DOL) to withdraw it and submit a ruling document,” he said.

Many concluded that given the new fiduciary and reporting requirements, plan sponsors might simply decide that continuing to offer brokerage windows was no longer worth the potential liability or the administrative time and cost involved.

On July 24, 2012, Sen. John Kerry (D-Mass.), a member of the Senate Finance Committee, sent a letter to DOL Secretary Hilda Solis asking that the guidance on brokerage windows in FAB 2012-2, Question 30, be withdrawn "given the lack of notice and opportunity for comment," and that the DOL "allow all parties to appropriately consider the relevant policy and administrative issues implicated by Q&A-30 and provide comments to ensure that the final guidance is workable."

Pullback by the DOL: Window-Selected Funds Not DIAs

In response to this criticism, on July 30, 2012, the DOL issued FAB 2012-02R, which supersedes FAB 2012-02. The new bulletin, while clarifying that plan sponsors have a fiduciary responsibility over the brokerage window platform, contains no requirement to treat investment options available through the window as DIAs subject to the new fee disclosure requirements—regardless of how many participants select the same investment.

“We commend the U.S. Department of Labor for its swift response to the serious concerns of the defined contribution plan community,” said Lynn Dudley, senior vice president for policy at the American Benefits Council, a trade group, on the release of FAB 2012-02R. “Now that this issue has been resolved, employers can focus on compliance with the newly effective fiduciary-level fee disclosure requirements and the participant-level fee disclosure requirements.”

Fiduciary Responsibilities Clarified

The new bulletin states, in Question 13, that the new quarterly fee disclosures apply to the brokerage window platform itself, over which plan sponsors have a fiduciary responsibility, and that plan administrators must provide all plan participants and beneficiaries (whether they use the window or not) with:

A general description of the brokerage window.

An explanation of all fees to be charged against individual accounts for using the window, including initial and ongoing fees for selecting and maintaining investments and trading fees charged by the plan.

In addition, for participants or beneficiaries who use the window, the plan administrator must provide:

A statement of any dollar amount of fees charged during the preceding quarter against the individual's account in connection with the window.

However, the new guidance clarifies that in terms of investment-specific purchase and sales charges:

The department understands that in some circumstances the specific amount of certain fees associated with the purchase or sale of a security through a window…may vary across investments available through the window or may not be known by the plan administrator or provider of the window. … In recognition of the foregoing, a general statement that such fees exist and that they may be charged against the individual account of a purchasing or selling participant or beneficiary, and directions as to how the participant can obtain information about such fees in connection with any particular investment, ordinarily will satisfy the requirements (of the regulation).

Joanne Sammeris a New Jersey-based business and financial writer. Stephen Miller, CEBS, is an online editor/manager for SHRM.​

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