On August 20, 2014, the U.S. Department of Labor published a request for information on the use of brokerage windows in 401(k) plans.

Most employers allow participants to choose among a limited set of specific investment options, which are selected and monitored by plan fiduciaries. However, some employers provide participants access to “brokerage windows” in addition to, or in place of, specific investment options under their 401(k) plans. These arrangements allow participants to choose from a broad range of investments beyond those specifically designated by plan fiduciaries.  

In the request for information, the DOL points out that opinions are mixed as to whether such arrangements benefit participants. On the one hand, the DOL notes that some believe brokerage windows are attractive for sophisticated participants and benefit unsophisticated participants by reducing the likelihood that a plan will need to adopt a large number of designated investment alternatives in order to satisfy demands by more sophisticated participants. Conversely, the DOL cites articles indicating that brokerage windows present undue risk for many participants because fiduciaries do not engage in a deliberative process to affirmatively review and select each of the investment options available through the brokerage window. 

The DOL’s goal in issuing the request for information is to assist the DOL in determining whether, and to what extent, regulatory standards or other guidance concerning the use of brokerage windows may be necessary to protect plan participants. In addition, the DOL wants to ensure that plan fiduciaries properly understand the scope of their ongoing responsibilities with respect to brokerage windows. 

The request for information provides insight into the DOL’s thinking in this area. Many of the requests may be of particular interest to fiduciaries of plans that offer, or are considering offering, brokerage windows and include:

  • Participation in Brokerage Windows. The DOL is interested in learning about the characteristics of participants who use brokerage windows, the portion of plan assets invested in brokerage windows, the type of restrictions placed on brokerage window participation, and the investment and benefit outcomes of participants who invest through brokerage windows.
  • Selection and Monitoring of Providers. The DOL is interested to learn how many vendors plan fiduciaries research and contact prior to establishing brokerage windows, whether record-keepers require plans to use affiliated brokerage services, what factors fiduciaries consider in deciding whether to include brokerage windows, what role plan fiduciaries play in the selection of brokers, advisers, or other service providers and how plan fiduciaries monitor the performance of these service providers.
  • Monitoring of Investments. The DOL is interested to learn how plan fiduciaries monitor investments made through brokerage windows (e.g., by looking at specific investments selected, asset classes, or allocation information), whether fiduciaries view this information as helpful and how often plan fiduciaries request and review this information.
  • Brokerage Window Costs. The DOL is interested in learning about the costs associated with brokerage windows, whether plan sponsors versus participants pay for the cost of such windows, the extent to which brokerage windows are subsidized by participants who don’t use the windows, how fiduciaries weigh, monitor and oversee the fees and costs of brokerage windows and related services and how much discretion fiduciaries have in negotiating brokerage commissions and other costs.
  • The Role of Advisors. The DOL would like to know how often plan fiduciaries engage advisers to assist with decisions about whether and what type of brokerage windows to include in their plans. 

Finally, the DOL notes that it has received questions from fiduciaries and service providers that may indicate a need for guidance on ERISA’s fiduciary duties, including the duty of prudence, loyalty and diversification, both with respect to the use of a brokerage window as a plan feature and also with respect to investments available under the brokerage window. The DOL has requested comments by November 19, 2014. Depending on the comments it receives, the DOL may pursue additional rulemaking in this area.