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.
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