Seldom-used 401(k) brokerage windows being reviewed by DOL

The Department of Labor is taking another look at disclosure rules for brokerage windows in 401(k) plans, an effort that has effectively been on pause since 2014.

The retirement plan industry, however, is not keen on changes.

At a hearing last week, representatives from lobbying groups and retirement plan providers testified before the DOL’s ERISA Advisory Council. Their message, overall, was that very few investors use self-directed brokerage accounts, but that those features are nonetheless an important component of the plans in which they’re included.

The council is examining how brokerage windows are designed in different plans and how they're used by participants, with the potential outcome being a recommendation that the DOL issue guidance “to ensure that plan participants and beneficiaries with access to a brokerage window are adequately informed and protected under ERISA,” it stated.

In 2012, the DOL published a field assistance bulletin that clarified what information about brokerage windows must be included in the disclosures 401(k) participants receive. That guidance, however, did not cover fiduciary standards, the council noted.

Brokerage windows let 401(k) savers access a vast amount of different investments, including mutual funds and individual stocks. Plans often include them as a way to give seasoned investors more options without having to add funds to their 401(k)’s core investment menu.

Recently the federal government disclosed that the $760 billion Thrift Savings Plan would soon offer access to environmental, social and governance funds through a brokerage-window-style option.

Last year, 2.4% of participants in large and medium-sized 401(k)s used brokerage windows, investing on average half of their plan assets in them, according to figures from record keeper Alight Solutions, which the company's executive vice president Alison Borland cited in her testimony to the council.

The use of brokerage windows is highest among older, longer-tenured workers with high account balances, according to Alight. Less than half (46%) of the company's plan clients offered brokerage windows to workers in 2019, up from 42% in 2017 and just 26% in 2009.

Meanwhile, the average number of investment options on plan menus has remained mostly constant over the past 10 years, at about 14, excluding individual target-date funds, Alight data show.

Although there is the potential for some participants to mismanage their 401(k) assets, they must “affirmatively agree to the terms and conditions of these brokerage accounts and are responsible for any fees associated with maintaining and trading in those accounts,” Borland’s testimony read.

Despite the possibility that participants may be more interested in day-trading in their 401(k)s in light of this year’s meme stock explosion, fewer people appear to be using self-directed brokerage accounts so far this year, an Alight spokesperson said in an email.

“We believe that brokerage windows, while not appropriate for all investors, do provide a beneficial investment option for certain plan participants who are interested and willing to take a very hands-on approach to managing their investments,” Borland said, urging the DOL to avoid additional fiduciary or disclosure requirements. “It is also our view that participants with access to brokerage windows are adequately protected under ERISA.”

Often 401(k)s have limits on the percentage of account assets that can be invested through a brokerage window, Frank Porter, relationship manager for large plans at Empower Retirement, said in his testimony. People who use the feature are often “astute investors,” he noted.

“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,” he stated.

Another group, the ERISA Industry Committee, which represents large employers, said that the DOL should let the current requirements stand.

“Large plan sponsors who decide to offer brokerage windows understand their disclosure and fiduciary obligations and their plan participants are protected,” ERIC senior vice president of retirement and compensation policy Aliya Robinson wrote. “As such, we strongly advise against additional guidance from the DOL.”

One group that does support additional guidance is the U.S. Chamber of Commerce.

“Based on member input, such requests include wanting more varied investment options beyond the core lineup or requesting a specific type of investment, such as Shariah investing, funds that do not include specific investments, or overall ESG investing,” Chantel Sheaks, vice president of retirement policy for the group, wrote.

“[The] DOL should make it easier for these to be offered by clarifying the application of ERISA Section 404(c) protection, by issuing tip sheets to help plan sponsors understand what is involved from selecting, to monitoring to terminating a brokerage window option and by providing model language and a checklist of suggested participant disclosures,” Sheaks wrote.