investment-oriented | PLANADVISER March/April 2017

Window Guard

How to help limit the potential risks of brokerage windows

By Judy Ward | March/April 2017
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Art by Jon Han

Self-directed brokerage windows (SDBWs) are commonly a large-plan element. According to the 2016 PLANSPONSOR Defined Contribution (DC) Survey: Plan Benchmarking, only 18.7% of plans of all sizes have a brokerage window. However, while just 7.7% of plans with less than $1 million make them available, nearly half, 49.6%, of plans with more than $1 billion do so—despite some concerns that participants may imprudently invest their money. Advisers serving the upper end of the market should be familiar with this option—and how to limit the risks for both sponsors and participants.

Eric Droblyen, president and CEO of Employee Fiduciary, a third-party administrator (TPA) in Mobile, Alabama, recommends to his sponsor clients that their plans have no brokerage window option. “I just don’t like giving participants too much rope to hang themselves,” he says of the risk that they will invest unwisely. And he sees growing concern about brokerage windows among federal regulators such as the U.S. Department of Labor (DOL). “I don’t like the regulatory trend line here,” he says. “And, given that trend line, there’s potential for participant litigation. Why take the risk?”

But in reality, Droblyen recognizes, sometimes a company’s top executives push for a SDBW option in their 401(k) plan, and that frequently explains why it gets added. “In many cases, it is the owners or the primary plan decisionmakers who want it,” he says.

Here are several ways by which plans with brokerage windows can reduce the potential risks:

• Limit investment options. “We’ve seen plan sponsors put up guardrails on what individual participants can invest in,” says adviser Cliff Dunteman, vice president and investment consultant at Francis Investment Counsel in Brookfield, Wisconsin. “Some plans allow participants to only invest in publicly traded, no-load mutual funds in the brokerage window.”

Tara Hessert, president of Dynamic Pension Services, Inc. (DPS), a TPA firm in Dayton, Ohio, says her plan clients that utilize brokerage windows mostly limit the investment universe to mutual funds and individual stocks. A law firm client also allows access to options, but that firm has in-house financial-services professionals manage the partners’ money. Outside that type of scenario, she does not recommend making such complex investment options accessible.