DOL Guidance Could Put a Crimp in 401(k) Brokerage Windows

Issues raised about plan sponsors' fiduciary oversight responsibilities

Stephen Miller, CEBS By Stephen Miller, CEBS April 28, 2022
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DOL Guidance Could Put a Crimp in 401(k) Brokerage Windows

Editor's Note: This article has been updated.

Guidance issued by the U.S. Department of Labor (DOL) in March warned 401(k) plan fiduciaries to "exercise extreme care" before adding cryptocurrency options to plan investment menus. But the guidance, Compliance Assistance Release No. 2022-01, extended its warning not only to plans that offer crypto as a designated investment, but also to plans that let participants invest in stocks, bonds and other securities through an open platform known as a brokerage window, also referred to as a self-directed brokerage account (SDBA).

Monitoring Brokerage Windows

"The plan fiduciaries responsible for overseeing [cryptocurrency] investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty," the guidance stated.

To attorneys who specialize in helping retirement plan fiduciaries comply with the Employee Retirement Income Security Act (ERISA), the DOL seemed to be warning that, contrary to its long-held position, plan fiduciaries should not only prudently select a brokerage window provider but also monitor investments made available through a brokerage window.

"This new investigative effort could raise an issue with an area of plan investments that most plan sponsors have not worried about a great deal. That is the issue of brokerage windows, which have previously not been subject to much, if any, scrutiny from the DOL," blogged John Kirk, an attorney at law firm Graydon in Cincinnati. "The prevailing thought was that the setting up of a self-directed brokerage opportunity was a fiduciary duty but, once set up, the investments were the sole responsibility of the participants."

He advised, "With this new guidance, plan sponsors may need to reconsider their approach. At the least, plan sponsors should determine if cryptocurrency is being invested in by participants."

Chicago-based Mike Barry, a senior consultant at retirement plan advisory firm October Three, wrote that because brokerage windows may include publicly traded stocks and thousands of mutual funds, it is "practically impossible to evaluate the prudence of all of these investments. Nevertheless, [the guidance] suggests that offering crypto in a brokerage window is 'subject to duties of prudence and loyalty.' "

Barry also questioned what he termed "in effect, regulation by news release, without the opportunity for comment and stakeholder feedback that the formal regulatory process provides."

Brenda Berg, a partner at Holland & Hart in Denver, similarly advised that "the DOL's recent commentary regarding cryptocurrency in the brokerage window may be suggesting that the fiduciaries also have duties regarding the design of the window and imposition of limits on available investments."

She recommends that fiduciaries, when structuring a brokerage window, consider issues such as:

  • Should investments in the brokerage window be limited in any way? Restrictions might include the type of investments (such as cryptocurrency or other higher-risk investments, employer stock, and investments otherwise available under the plan) or a percentage limitation.
  • Are participants sufficiently educated with respect to the brokerage window?
  • Is the brokerage window available to a nondiscriminatory group of participants?
  • Are plan record-keeping fees fairly allocated across the assets/accounts of participants investing through the brokerage window as well as other options?
  • How do the fiduciaries monitor and properly handle any prohibited transactions or unrelated business taxable income?

"Plans offering brokerage windows should stay alert," Berg advised.

Business Groups Critical of Move

The U.S. Chamber of Commerce, in an April 13 letter to Ali Khawar, acting assistant secretary of the DOL's Employee Benefits Security Administration, took the position that "nothing in ERISA or the regulations require ERISA fiduciaries to directly monitor each underlying investment option in a brokerage window," and that "it is impossible for a plan fiduciary to monitor every investment option in the window, and requiring such effectively would preclude offering a brokerage window."

Similarly, an April 12 letter to Khawar co-signed by the American Benefits Council and 10 other employer and industry associations, said it "would be time-consuming and expensive to modify systems to be able to track direct cryptocurrency investments in brokerage windows—and far more difficult to track 'related products.' … The issued guidance is thus not only inconsistent with current law and current established practices, but would also modify the law retroactively, such that a past failure to monitor brokerage window investments in a newly announced specified manner will be investigated as a likely violation of ERISA."

Consequences for Brokerage Windows

A proposed settlement of a class action lawsuit that involves offering plan participants access to a brokerage window was thrown into doubt by the new guidance, Bloomberg Law reported

"If the DOL were to require fiduciary oversight of individual investment options offered through brokerage windows, the monitoring obligations associated with maintaining such an offering in the plan would become materially more burdensome and costly," T. Rowe Price attorney Brian Boyle wrote in a Maryland federal court filing on April 25. 


Some, however, have raised concerns about the use of brokerage windows. Last December, for instance, market intelligence firm Cerulli Associates reported that although SDBAs provide retirement plan participants with access to numerous investment options, the resulting investments can also create potential risks to participants and plan sponsors.

"It would be both easy and unsurprising for plan participants to overestimate their investing knowledge," said Shawn O'Brien, senior analyst at Cerulli. "With the freedom to choose from a wide array of investments and execute trades as they see fit, these individuals may end up overtrading or taking on more or less risk than is prudent given their age and circumstances."

Brokerage Windows More Common

While only a minority of 401(k) and similar plans provide brokerage windows, those numbers have been rising.

Investment firm Vanguard's How America Saves 2021 report disclosed that among the 1,700 employer-sponsored plans for which it provided record-keeping services, 20 percent offered a self-directed brokerage window, rising to 38 percent among plans with at least 5,000 participants.

Among large plans with more than 50,000 participants that Fidelity administers, "close to 58 percent offer self-directed brokerage, whereas 10 years ago, 35 percent did so," said Chris Herman, head of investment strategists for workplace investing at Fidelity Investments.

Smaller plans are less likely to offer a brokerage option, he noted.

Update: A Partisan Divide

The Department of Labor's cryptocurrency guidance has provoked contrasting responses on Capital Hill.

On May 5, Sen. Tommy Tuberville, R-Ala., introduced legislation that would prohibit the DOL from limiting the kinds of products workplace retirement savers can invest in through self-directed brokerage accounts.

A day earlier, Sen. Elizabeth Warren, D-Mass., criticized Fidelity Investments for its decision to launch a new 401(k) cryptocurrency product, in a May 4 letter to Fidelity CEO Abigail Johnson.


Related SHRM Article:

Fidelity to Allow Bitcoin Investments in 401(k) Accounts, SHRM Online, April 2022

DOL Warns 401(k) Plans Against Allowing Crypto Investments, SHRM Online, March 2022

401(k) 'Windows' Reconsidered as Portals for ESG Investments, SHRM Online, July 2021


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