Compliance December 11, 2014

Industry Groups Urge No Further Rules for Brokerage Windows

Responding to a request for information from the DOL, most industry groups said they believe no further regulation is necessary to govern use of brokerage windows in retirement plans.
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Retirement industry groups responding to a request for information (RFI) from the Department of Labor (DOL) about the necessity of definition and disclosure regulations about brokerage windows were mostly against such guidance.

As summed up in a letter from the Insured Retirement Institute (IRI), relatively few plan sponsors actually include brokerage windows in their plans, and among plans that offer brokerage windows, an extremely small percentage of participants in those plans actually use the brokerage window. The majority of participants who invest through brokerage windows are typically highly compensated senior executives with sizable account balances, a group that tends to be sophisticated investors for whom additional regulatory protections are not needed.

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The IRI suggested, as did other industry groups, imposing additional regulatory burdens with respect to brokerage windows would likely cause plan sponsors to cease offering them, which could adversely impact plan participants in one of several ways:

  • Some plan sponsors would replace the brokerage window with a larger and more complex menu of investment options in order to accommodate sophisticated investors who want more choices, which would make it more difficult for average participants to choose appropriate investments;
  • Some plan sponsors may opt to eliminate the brokerage window from their plan, depriving participants of access to a wider variety of investment options;
  • Small sponsors might cease offering their plans entirely, and would be less likely to initiate new ones.

Most commenters said they are not aware of any reported abuses or concerns involving brokerage windows that would necessitate additional regulations.

In its response, the Securities Industry and Financial Markets Association (SIFMA) said it believes the DOL has already addressed any ambiguity surrounding what constitutes a brokerage window or similar arrangement through its clarification of what constitutes a “designated investment alternative” in Q&A 39 of Field Assistance Bulletin 2012-02R. In that Q&A, answering the question of whether a brokerage window or similar arrangement (with respect to which a fiduciary did not designate any of the funds on a platform) constitutes a “designated investment alternative,” the DOL answered “no.” The regulator said explaining that “[w]hether 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.”

In the same answer, the DOL also made clear that, with respect to brokerage windows and similar arrangements, fiduciaries of the plan are still bound by “ERISA section 404(a)’s statutory duties of prudence and loyalty to participants and beneficiaries . . . including taking into account the nature and quality of services provided in connection with the platform or brokerage window.” 

SIFMA said it believes the guidance provided by the DOL to date is sufficient to ensure a fully informed and prudent process for making determinations associated with implementing and offering a brokerage window as part of a retirement plan.

The Investment Company Institute (ICI) also said it feels prior DOL guidance is sufficient. It noted that, “The Department’s historical practice of excluding investments held in brokerage windows from the status as DIAs [designated investment alternatives] is both understandable and appropriate given the attendant obligations and exposure inherent in such a characterization.” The ICI said compliance with the obligations of a DIA, including disclosure requirements, for each investment offered through a brokerage window would be virtually impossible and would overwhelm plan participants. 

There were some commenters that believe additional regulations about brokerage windows could be helpful. Among those was Russell Investments, which said rules for DIAs and brokerage windows should be very distinct and fiduciaries do not always understand what is expected of them with regards to brokerage windows.

For example, Russell suggested guidance about:

  • What should be considered a brokerage window and what should be considered a DIA;
  • The circumstances in which it is prudent to offer a brokerage window, and the circumstances in which it is not;
  • Conditions that must be met within a brokerage window, including disclosure requirements;
  • Necessary steps to ensure that those who use a brokerage window are aware that there is a different level of fiduciary responsibility for the plan sponsor with regard to those investments; and
  • What data ought to be gathered to monitor the brokerage window, and the purpose for which that data should be applied.

The National Association of Plan Advisors (NAPA) suggested the DOL establish a small-plan exception for brokerage window-only plans. To encourage small employers to sponsor defined contribution plans, NAPA said, employers with 99 or fewer employees eligible to participate in the plan should be allowed to open brokerage window-only plans, so long as each participant positively elects his or her investment choices on the brokerage window account application form. If a participant fails to make such an election, no contributions can be made to the plan on the participant’s behalf until the election is made.

In addition, NAPA suggested fiduciaries of retirement plans with 100 or more eligible employees must designate a core menu of investment options before an brokerage window can be offered to participants and beneficiaries. It also urged the DOL to continue to permit aggregate reporting of plan assets held in brokerage window accounts under the “other” category of Schedule H of the Form 5500. “The degree to which plan recordkeeping systems are integrated with brokerage account systems varies widely. A mandate to report … investments by asset category would drive up costs with little real benefit to participants,” NAPA said.

Responses to the DOL’s request for information about brokerage windows can be accessed here.

Compliance December 11, 2014

Solicitor General Argues for Reversal of Tibble Decision

A brief submitted by the U.S. Solicitor General to the United States Supreme Court argues in favor of plaintiffs in Tibble v. Edison International—a case that could have implications for retirement plan sponsors' ongoing duty to monitor investments.
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The brief argues that the plaintiffs’ claims for breaches of fiduciary duty are timely because “they are claims for breaches of the duty of prudence within the limitations period.” This is a critical issue in the case, which reached the Supreme Court from the 9th U.S. Circuit Court of Appeals on a question of whether damages assessed against utility company Edison International for failing to pursue cheaper share classes for mutual funds offered as retirement plan investments should be limited only to those funds added to the investment menu within the Employee Retirement Income Security Act’s (ERISA’s) six-year statute of limitations period.

The brief says “the Investment Committees (Edison International Trust Investment Committee and Trust Investment Subcommittee) were not informed about the institutional share classes and did not conduct a thorough investigation” of fund fees. According to the Solicitor General, these facts “establish breaches of the ongoing duty of prudence within the limitations period, because a prudent fiduciary would have considered whether institutional-class funds were available and would have offered those funds to save money for plan participants.”

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Additionally, the brief says the 9th Circuit misunderstood the claims and that the lower courts’ rulings, if allowed to stand, could have a greatly adverse effect for participants in and beneficiaries of ERISA retirement plans.

Case documents show that, during the initial bench trial, a district court held that utility company Edison International had breached its duty of prudence by offering retail-class mutual funds as retirement plan investments when lower-cost institutional funds were available. But, the court limited that holding to three mutual funds that had first been offered to plan participants within the six-year statute of limitations period under ERISA—meaning mutual funds placed on the plan menu more than six years before the date of the complaint were excluded from the decision.

The decision was appealed to the 9th Circuit, which upheld the district court’s decision to limit the settlement to the three mutual funds adopted within the ERISA limitations period. This led to the Solicitor General’s first brief, in which the government’s chief appellate lawyer sided with Tibble on the argument that such claims should not be time-barred.

Some in the retirement planning industry see big stakes in the case, suggesting a ruling in favor of the plaintiffs could significantly expand fiduciary liability and the potential for plan participants to file disruptive fiduciary breach claims under ERISA. Others say the sky won’t fall for plan sponsors and employers if the limitations period is found not to apply in this case.

In a recent conference call, one ERISA specialist said the real issue at hand in Tibble v. Edison has less to do with the strength or weakness of the ERISA limitations period than many in industry and media have suggested. As Fred Reish, an attorney with Drink Biddle & Reath and leader of the firm’s ERISA practice, explains, “the true issue before the Supreme Court is whether there is a discreet and ongoing duty to monitor investments that is distinct from the initial duty to select.” 

“The trial court and the 9th Circuit, consistent with other appeals courts, ruled that once the six-year window has gone by from when an investment was selected, there is no continuing duty to monitor,” Reish explains. “As the decision stands, the duty to monitor doesn’t start that limitation period again each year, it doesn’t keep rolling that way. So once six years go by from the initial fund selection, the fiduciaries are safe from plaintiffs seeking damages.” 

Reish says the lower court rulings create some tension between the plan sponsor community, which wants to have protection from costly litigation, and the financial adviser and ERISA consultant community, which for years has been preaching that there is a distinct and serious duty to monitor.

“If this goes if favor of the defendants it will eliminate or substantially reduce the ongoing duty to monitor,” Reish notes. “In this sense, again, the question before the Supreme Court is not really a statute of limitations question, as some have interpreted. The real question is whether there is an independent duty to monitor that has its own six-year statute of limitations, such that every year the failure to monitor starts a new limitation period, and the sponsor can then be sued on at any point in the next six years once a failure to monitor has occurred.”

Reish urges both the plan sponsor and adviser communities to “watch this very carefully, because it could diminish the perceived value of advisers if the Supreme Court says there is no legal separation between the ‘ongoing duty to monitor’ and the original decision to select.”

On the other hand, he warns, if the Supreme Court says there is a separate ongoing duty to monitor that exists as its own separate legal entity, and that the statue of limitations runs on this ongoing duty independent of the initial selection, it would effectively reinforce the importance of monitoring and could enhance the value of advisers.

“And then there could be an inside position,” he says, “which would say something like, the duty to monitor is not generally a separate duty, but on occasions it can be. And then the Supreme Court could define or outline what some of those cases are.

“Hold on to your seats,” he concludes, “because it’s going to be significant.”

The text of the Solicitor General's new brief is here.

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