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A Better Partnership


Jul 2012
July 17, 2012

More Oversight for 401(k) Brokerage Windows

If your 401(k) or similar ERISA plan allows participant investment direction, it's well established that it's prudent to offer participants a variety of investment alternatives. In addition to a general investment menu, many plans offer brokerage windows, segregated accounts or similar self-directed arrangements (referred to here as brokerage windows) through which participants may opt to invest in numerous alternatives. Sometimes those alternatives are as broad as the universe of mutual funds, stocks and bonds.

If you have a plan with a brokerage window or are contemplating one, it's very important to consider Department of Labor (DOL) guidance issued in May and subsequent statements that raise new questions about what is a prudent level of disclosure and monitoring for brokerage window investment alternatives.

Disclosure of Fees

Recent DOL guidance indicates fees for some of the investment alternatives available through brokerage windows with at least 25 alternatives should be disclosed to participants in a manner similar to alternatives on the plan's general investment menu. The DOL takes that position even if you don’t have a general investment menu in your plan and rely solely on the brokerage window.

Warner’s John McKendry explains in a recent article which alternatives are subject to disclosure. Most in the retirement plan community previously believed that investments available through a brokerage window were not subject to this level of disclosure and were very surprised to learn the DOL thinks otherwise.

Practically, most current platforms are ill-prepared to provide employers with information about brokerage window alternatives. Also, some plans include multiple brokerage windows with no central provider to collect and coordinate information. Many question whether this might lead the DOL to soften its stance. So far, it hasn't. Instead, the DOL has pointed out that its guidance merely describes a safe harbor. The uncertainty over whether the DOL will relent presents a dilemma for plan sponsors. It could take a long time to chase down the information to comply, making waiting detrimental. But if the DOL backs off, the extra work may have been done for no reason.

Monitoring Alternatives

The DOL's recent guidance discussing brokerage windows also suggests that failing to designate a “manageable” number of alternatives may be imprudent and raises questions about the extent to which an employer must monitor window alternatives to fulfill its legal obligations. This has ignited a debate over whether employers must monitor only the availability of a brokerage window or some actual investment alternatives available through the window. For now, the DOL simply says, you can't "set it and forget it."

Given the practical challenges of obtaining information about window alternatives, it's questionable whether employers can continue to offer a brokerage window without substantial risk unless the DOL changes or clarifies its position. Until then, if you have a brokerage window it's important to consult your ERISA counsel to determine how and when to start collecting fee information and to understand the fiduciary implications of continuing to offer the window.

In many cases, it will be appropriate to start gathering information now and formulating a plan for the eventual additional disclosures required. If you're contemplating adding a brokerage window arrangement, you may want to consider delaying that decision until the DOL position on these issues becomes more clear.

Finally, it's important to remember that this issue is still developing. We will continue to monitor these developments. If you have questions, please contact a member of the Warner Norcross & Judd Employee Benefits/Executive Compensation Group.

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