Industry Groups Say No New Regulations Needed Regarding Brokerage Windows

The 2021 Advisory Council on Employee Welfare and Pension Benefit Plans, also called the ERISA [Employee Retirement Income Security Act] Advisory Council, recently held a meeting in which it received testimony about brokerage windows in defined contribution (DC) retirement plans, which are often referred to as self-directed brokerage accounts (SDBAs).

The council said it will examine brokerage windows to gain a better understanding of their design, prevalence and usage. In 2012, the Department of Labor (DOL) issued a revised Field Assistance Bulletin that clarified what information related to a brokerage window needs to be disclosed under the participant level fee disclosure regulation and that a brokerage window is not in and of itself a designated investment alternative. The guidance did not address ERISA’s fiduciary standards for brokerage windows.

In 2014, the DOL issued a Request for Information (RFI) focused on why and how often brokerage windows are offered and used in ERISA-covered plans. The ERISA Advisory Council said the agency was interested in whether guidance would be appropriate and necessary to ensure that plan participants and beneficiaries with access to a brokerage window are adequately informed and protected under ERISA. The council said its examination is intended to assist in the DOL’s effort.

Responding to the DOL’s 2014 RFI, most industry groups said they believe no further regulation is necessary to govern use of brokerage windows in retirement plans. The ERISA Advisory Council heard similar sentiments during its meeting last month.

Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee (ERIC), provided testimony at the meeting as a representative for large plan sponsors. She told the council that large employers are confident in their abilities to include brokerage windows as an option under the current guidance provided under ERISA and do not need any further guidance on the issue.

“ERIC believes that comprehensive guidance issued under ERISA and by the Department of Labor already protects participants in large retirement plans that include brokerage windows. Therefore, any additional protections for participants are unnecessary and would be redundant,” said Robinson.

An ERIC survey found 61% of member companies provide a brokerage window as part of their plans’ investment lineups. Three-quarters said they do so to expand available investment options under the plan. In addition to the survey, ERIC met individually with about 10 respondents who offer brokerage windows to get additional perspectives. All of those respondents emphasized that they make clear disclosures that the brokerage window is not subject to the fiduciary protections of the other in-plan investment options and that investments within the brokerage window are the complete liability of the participant. About half allow personal financial advisers access to the brokerage window to provide advice to those participants.

“Overall, our strong sense from the survey and the additional discussions with respondents is that the large plan sponsors that include a brokerage window as an investment option consider it an important part of the investment lineup and make concerted efforts to ensure that participants who invest in the brokerage window are aware of the risks,” Robinson said.

Robinson went on to note that fiduciaries of large plans already prudently select and monitor their plans’ designated investment alternatives, spending “significant time and resources to determine appropriate investment options for participants.” She said some plans include brokerage windows for their more sophisticated investors who have the resources available to them to evaluate the investments that are available through the brokerage window. She urged the DOL to support the efforts of these plans and their fiduciaries who strive to comply with the intent of ERISA and its specific requirements.

“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,” Robinson said. “The benchmarks available for the designated investment alternatives are not appropriate and cannot be applied to the evaluation of individual stocks and many of the other investments available through brokerage windows. Placing these burdens and risks on plan fiduciaries could have the result of plans dropping brokerage windows, which could very well cause those participants who rely upon these windows to abandon the employer retirement system in favor of IRAs [individual retirement accounts] or even non-retirement funds in which an open investment arena would remain available.”

Chantel Sheaks, vice president, retirement policy, U.S. Chamber of Commerce, submitted a written statement that said brokerage windows are likely used by more sophisticated retirement plan investors. She also said they are important tools for plan sponsors to use to respond to unique participant investing needs. “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 [environmental, social and governance] investing,” Sheaks said.

“More disclosure is not needed, rather better disclosures are needed,” Sheaks added. She said the Chamber of Commerce believes the DOL should make it easier for plan sponsors to offer brokerage windows 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.

Specifically, Sheaks said the DOL should clarify that if a fiduciary otherwise meets the requirements under ERISA Section 404(c) and the applicable regulation, including the required fee disclosures, the fiduciary is not liable for any losses that a participant or beneficiary may incur from investing in a brokerage account. In addition, she recommended that the DOL clarify that the duty to monitor applies to monitoring the brokerage account service provider, but not to each underlying investment.

Sheaks also said the DOL could assist plan sponsors by issuing model disclosures for them to use to inform participants. Her written testimony included sample language and a list of other useful pieces of information plan sponsors could consider disclosing.