Executive Summary

On July 30, 2012, the Department of Labor (“DOL”) announced it has withdrawn Q&A 30 from Field Assistance Bulletin 2012-02 and replaced it with a new Q&A 39 in its revised Field Assistance Bulletin 2012-02R. See text of Q&A 39 below. The revised version (FAB 2012-02R) can be found at EBSA’s website: http://www.dol.gov/ebsa/regs/fab2012-.

While continuing to maintain that adding a brokerage window to a plan is subject to ERISA’s fiduciary duties, the DOL withdraws the “1% of participants”[1] test that conceivably could have required plan fiduciaries to “look through” plan brokerage windows and treat any investments held by a certain number of plan participants as a “designated investment alternative” of the plan.  

Q&A 39 is a welcome revision for plan fiduciaries, as the language is much more in keeping with longstanding principles regarding brokerage windows, namely that: (1) fiduciaries cannot set up brokerage windows in plans simply to avoid other ERISA duties; and (2) fiduciaries must carefully select and monitor the providers of brokerage windows in order to protect the best interests of participants. While the DOL has revised its guidance on this issue for now, it may address the issue in the future, saying that it will “engage in discussions with interested parties to help determine how best to assure compliance with [ERISA fiduciary duties related to brokerage windows] in a practical and cost effective manner, including, if appropriate, through amendments of relevant regulatory provisions.”  

Discussion

The DOL’s Employee Benefits Security Administration (“EBSA”) revised Field Assistance Bulletin 2012-02 Pursuant (FAB 2012-02) by removing troubling language (Q&A 30) that potentially imposed duties on plan fiduciaries to treat investments offered through a plan brokerage window as though they were designated plan investment alternatives.  

Pursuant to regulations finalized in October 2010,[2] beginning on August 30, 2012, plan administrators must provide annual and quarterly disclosures regarding fees and expenses charged to participants and beneficiaries in participantdirected individual account plans (e.g., 401(k) plans). Earlier in 2012, EBSA released FAB 2012- 02 in order to provide guidance based on questions it had received regarding the new fee disclosure rules. One answer provided in FAB 2012-02 (Q&A 30) has raised a lot concerns for plan fiduciaries of plans that provide participants the ability to invest through brokerage windows and similar arrangements. In Q&A 30 of FAB 2012-02 (before the July 30, 2012 revisions), EBSA stated that a brokerage window or similar arrangement is not itself a designated investment alternative under the plan subject to the fee disclosures required for designated investment alternatives. Nevertheless, EBSA suggested that plan fiduciaries may have to regularly monitor participant trading activity in brokerage windows and perhaps designate options available through the window as investment options under the plan. EBSA also suggested that plan fiduciaries might have to determine whether brokerage windows are unmanageable for participants.  

Moreover, EBSA provided a safe harbor compliance method for brokerage windows that hold more than 25 investment alternatives. EBSA stated that it would not require that all investments in the platform be treated as designated investment alternatives if the plan administrator (1) made the required designated investment fee disclosures for at least three of the investment alternatives on the platform that collectively meet the “broad range” requirements in the ERISA 404(c) regulation; and (2) made the required designated investment fee disclosures with respect to all other investment alternatives on the platform in which at least five participants and beneficiaries, or, in the case of a plan with more than 500 participants and beneficiaries, at least one percent of all participants and beneficiaries, are invested on a date that is not more than 90 days preceding each annual disclosure.  

Q&A 30 caught the benefits community off-guard– it appears to place duties on plan fiduciaries with respect to brokerage windows that few thought existed prior to Q&A 30. In the revised FAB 2012-02R, EBSA responded to this criticism by eliminating Q&A 30 and replacing it with Q&A 39. In Q&A 39, the DOL provided the following guidance:

  • Plans are not required to have a particular number of designated investment alternatives (whether an investment is a designated investment alternative for purposes of the fee disclosure regulations depends on whether it is specifically identified as available under the plan).
  • A plan fiduciary’s failure to designate investment alternatives under the plan in order to avoid investment disclosures under the fee disclosure regulation raises questions under ERISA section 404(a)’s general statutory fiduciary duties of prudence and loyalty.
  • Fiduciaries of plans with platforms or brokerage windows, self-directed brokerage accounts, or similar plan arrangements are still bound by ERISA section 404(a)’s statutory duties of prudence and loyalty to participants and beneficiaries who use those options, including taking into account the nature and quality of services provided in connection with the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement.  

Of course, plan fiduciaries should keep in mind that EBSA’s continued interest in the fees charged in retirement plans is likely to continue (if not intensify), so fiduciaries should be diligent in ensuring that participants receive the required fee disclosures and that fees being charged are reasonable.

Text of Q&A 39:

Q-39: A plan offers an investment platform that includes a brokerage window, self-directed brokerage account, or similar plan arrangement. The fiduciary did not designate any of the funds on the platform or available through the brokerage window, self-directed brokerage account, or similar plan arrangement as “designated investment alternatives” under the plan. Is the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement a designated investment alternative for purposes of the regulation?

A-39. No. Whether an investment alternative is a “designated investment alternative” (DIA) for purposes of the regulation depends on whether it is specifically identified as available under the plan. The regulation does not require that a plan have a particular number of DIAs, and nothing in this Bulletin prohibits the use of a platform or a brokerage window, self-directed brokerage account, or similar plan arrangement in an individual account plan. The Bulletin also does not change the 404(c) regulation or the requirements for relief from fiduciary liability under section 404(c) of ERISA or address the application of ERISA’s general fiduciary requirements to SEPs or SIMPLE IRA plans. Nonetheless, in the case of a 401(k) or other individual account plan covered under the regulation, a plan fiduciary’s failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raises questions under ERISA section 404(a)’s general statutory fiduciary duties of prudence and loyalty. Also, fiduciaries of such plans with platforms or brokerage windows, self-directed brokerage accounts, or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan are still bound by ERISA section 404(a)’s statutory duties of prudence and loyalty to participants and beneficiaries who use the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement, including taking into account the nature and quality of services provided in connection with the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement.  

The Department understands plan fiduciaries and service providers may have questions regarding the situations in which fiduciaries may have duties under ERISA’s general fiduciary standards apart from those in the regulation. The Department intends to engage in discussions with interested parties to help determine how best to assure compliance with these duties in a practical and cost effective manner, including, if appropriate, through amendments of relevant regulatory provisions.