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​Cold Water Thrown on Need for New Brokerage Window Guidance


Witnesses testifying before the ERISA Advisory Council largely panned the idea for additional fiduciary or disclosure obligations on DC plans that contain brokerage windows.  

During the two-day hearing held June 24-25, witnesses representing private companies, law firms, industry groups and other retirement plan stakeholders echoed similar themes throughout their testimony, noting, among other things, that participants who use brokerage windows are sophisticated investors familiar with the risks and that existing disclosures already inform participants. Additionally, they contended that any new fiduciary obligations might cause plans to cease offering brokerage windows. 

The 2021 Advisory Council agreed to examine brokerage windows to gain a better understanding of the number and types of plans that offer a brokerage window, the extent to which assets are invested in them and which plan participants use them. The Council also agreed to study the nature and extent of disclosures that plan participants receive.  

Earlier Guidance

In 2012, the Department of Labor issued a revised Field Assistance Bulletin (FAB) that clarified what information related to a brokerage window needs to be disclosed under the participant-level disclosure regulation and that a brokerage window is not in and of itself a designated investment alternative. Apart from the specific requirements of the participant-level disclosure regulation, the guidance did not address ERISA’s fiduciary standards. 

Additionally, the DOL issued a Request for Information in 2014 on the usage of brokerage windows in plans, but ultimately did not issue new guidance in this area.  

Kent Mason, Partner at Davis & Harman who appeared on his own behalf, noted that he was heavily involved in the 2012 policy discussions regarding Q&A-30 in FAB 2012-02, which resulted in DOL reconsidering that Q&A and addressing plan concerns by issuing FAB 2012-02R with new Q&A-39.

“In brief, I believe that DOL has already provided sufficient guidance on brokerage windows to serve the needs of plan sponsors and to protect participants,” Mason testified. “In this regard, I would be concerned about the potential for additional guidance or requirements related to brokerage windows to (1) have an adverse effect on the ability of plan sponsors to offer brokerage windows to their employees and (2) consequently, reduce both plan participation and sponsorship.”

Among other things, Mason noted that restrictions on brokerage windows would lead to pressure for more designated investment options, which may not be beneficial for many participants, and that the imposition of greater fiduciary responsibilities to monitor and evaluate brokerage window investments and provide additional investment-specific disclosures would be administratively unworkable for many plan sponsors. 

Do No Harm

Also testifying on his own behalf, Frank Porter, a Relationship Manager for Empower Retirement who currently serves as ASPPA President, argued that any new rules increasing a plan fiduciary’s responsibility for monitoring the performance of brokerage window investments would likely cause plan fiduciaries to cease offering these arrangements.

“While many providers support the notion of clarifying the disclosure rules so that participants understand the differences in cost, risk, and fiduciary oversight when investing through a window as compared to designated investment alternatives provided under the plan, I would caution that careful consideration be given to ensure unintended consequences do not come from such clarification,” Porter stated. He explained that these windows are used by “astute investors” who are already provided disclosures that provide a solid basis of the costs and risks. 

While noting that the DOL should make it easier for plan sponsors to offer a brokerage window if the sponsor feels it appropriate, Chantel Sheaks, Vice President of Retirement Policy at the U.S. Chamber of Commerce, suggested this could be done by issuing guidance that a plan fiduciary is not liable for monitoring each underlying investment, along with tips on how to offer a brokerage window and sample language describing what is involved with investing through a brokerage window.

“Requiring plans sponsors to provide additional disclosures related to the underlying investments in brokerage windows not only would be duplicative of current laws governing these investments but would be cost-prohibitive, because, as a practical matter, it would be impossible given the sheer number of options,” Sheaks emphasized. 

Alison Borland, Executive Vice President of Wealth Solutions & Strategy with Alight Solutions, along with Aliya Robinson, Senior Vice President of Retirement and Compensation Policy at The ERISA Industry Committee, offered similar points, arguing the DOL should not impose additional fiduciary or disclosure obligations, particularly where plans provide designative investment alternatives, because they note participants are already protected under the existing statutory and regulatory guidance.

Possible Guardrails

For his part, Kevin Mahoney, Business Development Officer at FinDec, cited data from the Plan Sponsor Council of America’s 63rd Annual Survey of Profit-Sharing and 401(k) Plans showing that nearly a quarter (23.2%) of all plans offer a self-directed brokerage account and nearly 40% of those with more than 5,000 participants do. But in noting that only 1.5% of plan assets are invested in SDBAs, Mahoney suggested that, as they become more popular, there are potential risks involved, particularly if participants do not understand investments or how markets tend to work in the long run. 

To that end, he suggested that “some guardrails would be appropriate for plan sponsors and other industry professionals to make sure everyone is protected.” He offered three potential areas to consider: 

  • disclosures for participants that explain the additional risks associated with brokerage accounts, along with clear language limiting the plan sponsor and plan advisors’ fiduciary liability;  
  • making sure that brokerage accounts, if available, are accessible to all participants on a non-discriminatory basis, and that when a participant wishes to hire an investment advisor outside the circle of the plan service provider, to have guidance on the outside advisor’s role and what fiduciary standing the advisor has in relation to the plan sponsor and participant; and  
  • that the menu of investment options in a brokerage window is clear about what is available under ERISA and what is not, and that any guidance stays updated when it comes to emerging investment options, such as cryptocurrencies.

The Council will next meet Aug. 26-27 for additional hearings and will hold more meetings in the fall to develop recommendations to send to the Employee Benefits Security Administration.