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.

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.

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.