The 2021 Advisory Council on Employee Welfare and Pension Benefit Plans has announced that it will examine brokerage windows in participant-directed individual account retirement plans that are covered by ERISA.  The work of the Council is designed to assist the Department of Labor’s effort to determine whether more guidance would be appropriate and necessary to ensure that plan participants who have access to brokerage windows are adequately informed and protected.   ERISA does not define what is a “brokerage window” or “self-directed brokerage window,” but a common definition is an investment option in a participant-directed 401(k) plan that gives participants and beneficiaries the capabilities to buy and sell investment securities through a brokerage platform, above and beyond the core lineup of investment options offered by the plan.

Past DOL Guidance

In 2012, the DOL issued a revised Field Assistance Bulletin clarifying the disclosure requirements relating to brokerage windows offered in ERISA plans.  Apart from disclosure requirements, the FAB did not address how ERISA’s fiduciary standards might apply to brokerage windows.

In 2014, the DOL issued a Request for Information to increase its understanding of the prevalence and role of brokerage windows in self-directed individual account plans, including why and how often brokerage windows are offered and used in ERISA-covered plans.

Industry Support for Brokerage Windows

In connection with the Advisory Council’s June 2021 meetings, various industry participants provided input on brokerage windows in participant-directed individual account retirement plans.

The U.S. Chamber of Commerce provided written comments under a heading that says it all, “Don’t break brokerage windows.”  The Chamber believes that “[b]rokerage windows allow plan sponsors to meet the unique investing needs of certain participants” and that the DOL “should make it easier, not more difficult, for plan sponsors to offer this option if a plan sponsor feels it appropriate.”  The Chamber asked the DOL to issue formal guidance along the following lines:

  • a plan fiduciary is not liable for monitoring each underlying investment
  • tips on if and how to offer a brokerage window
  • sample language that describes what is involved with investing through a brokerage window (proposed model language was attached to the Chamber’s submission).

The ERISA Industry Committee (ERIC), a national trade association that advocates exclusively for large employers on health, retirement and compensation public policies, also spoke in support of brokerage windows.  ERIC’s view is that the current guidance on brokerage windows is sufficient for plan sponsors, and the DOL should not impose additional fiduciary requirements on plans with brokerage windows.

Specific Issues Addressed by Industry

  Prevalence of Offerings and Rate of Uptake

The Chamber cites a 2015 AON study showing that about 40% of plans offered a brokerage window and a 2019 Vanguard report showing that about 19% of its 401(k) plans offered a brokerage window.  The AON study says that about 3-4% of participants participate in the brokerage window option, while the Vanguard report says only 1% of participants use them.

ERIC conducted a survey of its own members (who are plan sponsors).  About half responded, and of that cohort, about 60% reported that they provide a brokerage window as part of their investment lineup.  As for the percentage of participants who actually use the brokerage window, ERIC states that a little more than half of the plans report a usage rate of 0-5%.  Another 24% of the plans report a usage rate between 6-15%, with 10% of the plans reporting a usage rate of 16% or higher.

In sum, only a fraction of plans offer brokerage windows, and an even smaller fraction of participants actually invest in them.

  Benefits

The Chamber says that although participant uptake is “low,” brokerage windows are still an important tool for those participants who want more varied investment options beyond the plan’s core lineup.  For example, some participants may wish to engage in Shariah investing or overall ESG investing, and while it may not make sense for a particular plan to offer these specialized kinds of investments as part of the core menu of investment options, the brokerage window can provide an avenue for these particular participants to meet their investing goals.

A common theme running through the industry comments is that the plans that offer brokerage windows do so because participants request them.

  Types of Participants Who Use Brokerage Windows

One of the express goals of the Advisory Committee’s study is to determine “who” is currently using brokerage windows.  The industry submissions provide some glimpses at the answer.

According to the Chamber, those who use brokerage windows tend to have higher account balances and are generally more sophisticated investors and more highly educated individuals who often work in finance, investing, law or engineering.

ERIC states that highly compensated employees were not the majority of participants in the brokerage windows their members offered.

According to ERIC, of those participants who invest in a brokerage window, it “seems to be rare,” that a participant invests 100% of their retirement account balance through the brokerage window.

  Concerns Over Potential Litigation

The Chamber asked the DOL to issue guidance that would help prevent the current wave of ERISA excessive fee litigation from spilling over to brokerage windows.  Specifically, the Chamber asked that the DOL “clarify that if a fiduciary otherwise meets the requirements under ERISA Section 404(c) and the applicable regulation, including the required disclosures under 29 CFR § 2550.404a-5, the fiduciary is not liable for any losses that a participant or beneficiary may incur from investing in a brokerage account.”

ERIC expressed an oft-repeated concern of plan sponsors about uncertainty over the issue of whether the plan fiduciaries have a duty to vet and monitor each and every underlying investment option being made available to participants through a brokerage window.  As stated by ERIC, “Any guidance from the DOL that would seek to impose fiduciary responsibilities over specific brokerage window investments would be unwieldy, if not impossible, to satisfy; potentially putting plan fiduciaries in the position of having to evaluate the thousands of investments and their appropriateness with respect to the investing plan participant and the plan.”

ERIC stated that if the DOL seeks to impose fiduciary liability over the underlying individual investments in a brokerage window, it would have a chilling effect on plan sponsors, potentially causing them to drop brokerage windows.  Or it could cause participants who rely on brokerage windows to “abandon” the employer retirement system in favor of IRAs or non-retirement accounts in which an open investment structure would remain available.

Takeaways

It remains to be seen what the Advisory Council will recommend to the DOL on the subject of brokerage windows and whether the DOL will take any action.  Will the DOL take steps to give plan sponsors more comfort, or less comfort, around offering brokerage windows?  Or will it continue to take a relatively hands-off approach on the subject, preserving the status quo in which a portion of retirement plans decide to offer brokerage windows among their investment options and an even bigger portion decide not to?  www.ERISALitigation.com will continue to track these questions and will report back after the Advisory Council announces its findings.

 

 

Photo of Brian J. Lamb Brian J. Lamb

Brian is the leader of the firm’s Business Litigation practice group.  He represents companies and their directors and officers in complex business disputes, including ERISA litigation, securities and shareholder litigation, corporate governance and fiduciary disputes, and litigation arising out of mergers, acquisitions and…

Brian is the leader of the firm’s Business Litigation practice group.  He represents companies and their directors and officers in complex business disputes, including ERISA litigation, securities and shareholder litigation, corporate governance and fiduciary disputes, and litigation arising out of mergers, acquisitions and tender offers, and complex contract disputes. Brian also has significant experience litigating tax controversies against the federal government.