Compliance February 22, 2022

Council Recommends More Research About ‘Brokerage Window Only’ Plans

The ERISA Advisory Council declined to recommend additional regulations for brokerage windows in general, saying the costs outweigh the benefits.

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The ERISA Advisory Council has revisited the topic of brokerage windows in self-directed retirement plans in a recent report to Department of Labor Secretary Marty Walsh.

In 2012, as part of its Employee Retirement Income Security Act Section 404(a)(5) participant fee disclosure regulations, the DOL clarified in Field Assistance Bulletin 2012-02 what information related to a brokerage window needs to be disclosed under participant-level fee disclosures. In FAB 2012-02R, the DOL clarified that a brokerage window is not in and of itself a designated investment alternative.

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The Advisory Council report notes that the guidance did not deal with ERISA’s fiduciary standards, and there is no additional DOL guidance on this issue. To increase its understanding of the prevalence and role of brokerage windows in participant-directed individual account plans, the DOL issued a request for information in 2014. Responding to that RFI, industry groups urged the agency not to issue further rules for brokerage windows, saying very few plans offer them and, in plans that do offer them, few participants use them.

Data and testimony from providers and others showed that brokerage windows are now used by only a small proportion of eligible plan participants and that brokerage window users tend to be longer-tenure employees having higher than average plan balances, the ERISA Advisory Council report noted. The majority of council members were convinced that the cost of disclosures outweighed the benefit of disclosing the risk of brokerage windows, the lack of fiduciary oversight or the possible lack of adequate diversification.

However, the council recommended that the DOL should consider further fact-finding related to “brokerage window only,” or BWO plans—i.e., plans that have no designated investment alternatives and in which brokerage accounts are the sole investment option. The council expressed concern that financially inexperienced employees might be disadvantaged with a suboptimal experience as these types of plans may have limited features available to them as contrasted to the features available to participants in plans serviced through institutional recordkeepers and other plan service providers.

“The council members agreed that those types of plans may not incorporate the spirit of ERISA’s intent and protections for financially inexperienced employees and may need the department’s attention in the form of further fact finding,” the report says.

The council also expressed concern about when a BWO plan does not have a default brokerage window provider, saying this could be another barrier for financially inexperienced employees when deciding whether to participate in the plan. Employees may not have the ability or comfort level to select a brokerage provider to begin participating.

“The council believes that by focusing its fact finding in the BWO market, the department could obtain the necessary data to determine whether any further action is necessary,” the report says.

Compliance February 18, 2022

Taylor Corp. Facing ERISA Recordkeeping Fee Suit

The lawsuit represents yet another case of a sub-$1 billion retirement plan finding itself the subject of excessive recordkeeping fee litigation.

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Plaintiffs have filed an Employee Retirement Income Security Act excessive fee lawsuit against printing company the Taylor Corp. in the U.S. District Court for the District of Minnesota, claiming their retirement plan’s fiduciaries have failed to control recordkeeping costs charged to plan participants.

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According to the complaint, at all times during the proposed class period, the plan had at least $575 million in assets under management. As of December 31, 2020, the plan had net assets of more than $877 million and 12,157 participants with account balances, according to the plaintiffs, who say the plan’s size qualifies it as a large plan in the defined contribution marketplace.

“As a large plan, the plan had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments,” the lawsuit states. “The defendants, however, failed to exercise appropriate judgment and permitted the plan’s service providers to charge excessive administrative fees and expenses.”

Using arguments that closely resemble other lawsuits filed by plaintiffs represented by the increasingly active law firm Capozzi Adler, the plaintiffs here allege that the defendants breached the duties they owed to the plan and to the plaintiffs by failing to adequately monitor and control the plan’s recordkeeping costs.

The Taylor Corp. has not yet responded to a request for comment.

“The defendants’ mismanagement of the plan, to the detriment of participants and beneficiaries, constitutes a breach of the fiduciary duty of prudence, in violation of [ERISA],” the complaint states. “Their actions were contrary to actions of a reasonable fiduciary and cost the plan and its participants millions of dollars.”

Based on this alleged conduct, the plaintiffs assert claims against the defendants for breach of the fiduciary duties of prudence and failure to monitor fiduciaries. In addition to naming the company as a defendant, the lawsuit also targets members of the board of directors, as well as other officers of the firm who serve on the retirement plan’s fiduciary investment committee.

According to the text of the complaint, the plan has discretion to charge each participant for expenses of plan administration, including recordkeeping. However, the suit claims, the disclosures that are provided to plan participants fail to state the actual amount of plan administrative fees and expenses that have been or will be incurred by each participant. The suit contends that the plan sponsor and service provider have agreed upon a fee of $42 per participant annually to cover the cost of administrative services. It further states that these costs “may or may not be charged to participant accounts on a pro rata basis or a per capita basis, as the plan fiduciary chooses,” and that any charges to participant accounts may vary from year to year and are based upon the plan’s rules.

“In this case, using revenue sharing to pay for recordkeeping burdened the plan’s participants with excessive, above-market recordkeeping and administrative fees,” the lawsuit claims. “The defendants claim that Merrill Lynch agreed to a fee of $42 per participant to cover the cost of administrative services. However, as shown in the chart [included in the complaint], the plan’s per participant recordkeeping fees averaged $83.37 during the class period. There is no indication in the plan’s [Form] 5500s, auditor’s reports or participant fee disclosures that the plan ever received rebates of the recordkeeping fees in excess of $42 per participant.”

The lawsuit goes on to claim that the plan’s fiduciaries, had they acted prudently, would have negotiated recordkeeping fees in the range of $20 to $35 per participant.

The full text of the lawsuit is available here. 

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