investment-oriented | PLANADVISER March/April 2017

Window Guard

By Judy Ward | March/April 2017

Regulations do not require sponsors with a brokerage window to offer participant education about it, Oringer says. “You generally wouldn’t want to try to give these participants advice on the specific investments available under a brokerage window,” he notes. “But you can give them more general information about things such as appropriate asset allocations with the overall portfolio.”

• Separate brokerage window fees from other investment fees, and make them explicit. Sometimes Francis Investment Counsel takes on new clients that are offering a brokerage window but their service agreements include SDBW fees in the overall recordkeeping fee, not listed explicitly. “The issue with that is the participants invested in the target-date funds [TDFs] or other core funds are effectively subsidizing the administrative fee for participants invested in the self-directed brokerage window,” Dunteman says. SDBW-investing participants tend to have more trading commissions and may incur mutual fund load fees. “Plan sponsors need to be careful that the participants using the brokerage window are the ones paying all the fees associated with the brokerage window,” he adds.

• Implement a SDBW allocation limit or a liquidity requirement. Sponsors can set a limit on what percentage of their portfolio participants may invest in the brokerage window. “Those limitations are pretty rare, but, for plans that have a limit, usually it’s between 50% and 80% that a participant may invest in a self-directed brokerage account,” Droblyen says.

Sponsors also can impose a liquidity minimum for participants 100% invested in a SDBW, he says. That helps ensure all participants pay their share of plan administrative fees. “One of the risks as a fiduciary is, how do you allocate administrative fees equitably? Typically, some of the largest account balances in a plan may be the ones in the brokerage window,” he says, adding that those investments frequently are less liquid than the core menu. “With the core funds, it is much easier to pull money out for the administrative fee. So some sponsors will say something like, ‘We need your SDBW to maintain a $1,000 money market balance, so we can deduct plan administrative fees,’” he says.

• Re-evaluate regularly. Sponsors should look at participants’ brokerage-window transactions at least annually, Dunteman recommends. “So, for instance, if a sponsor limits participants to using only no-load mutual funds in the brokerage window, the sponsor should look at every transaction to make sure there were no violations of that policy,” he says. “Plan participants, unfortunately, can do a lot of harm to themselves in a very short time.”

Key Takeaways:

  • Advisers should ensure plan sponsor clients are aware about the DOL’s heightened unease over brokerage windows and explain the pros and cons of such an option.
  • Sponsors can mitigate risks associated with brokerage windows by limiting investments to just mutual funds and excluding company stock, providing education and separating the higher fees that participants pay for this option from other plan fees.