Following an in-depth examination of self-directed brokerage accounts, the ERISA Advisory Council made only one recommendation to the Labor Department—but it’s what the Council didn’t recommend that might be more significant.
As part of its 2021 study topics, the Council set out to gain a better understanding of the prevalence of brokerage windows, including the number of plans that have them and the extent to which assets are invested in them, which types of plans have them and which plan participants use them. Among the issues the Council considered as part of its examination were whether the DOL should:
- issue guidance with respect to the definition of a brokerage window;
- further examine brokerage-window-only (BWO) plans;
- require fiduciaries of plans that offer self-directed brokerage accounts to disclose to participants the risks associated with investing through a brokerage window; and
- undertake an educational campaign, including with respect to costs, the role of the plan sponsor and risks.
But after careful study and testimony from several witnesses, the Council decided to recommend only that the DOL consider further fact-finding related to BWO plans—i.e., plans that have no designated investment alternatives and brokerage accounts are the sole investment option. “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,” stated the 55-page report to Labor Secretary Marty Walsh.
Need for Guidance?
Yet, while the Council settled on making only the one recommendation, the report itself is much more insightful on the ongoing public policy issues and debate surrounding brokerage windows.
As background, in response to questions from the benefits community about the participant disclosure regulations under ERISA Section 404(a), the Obama-led DOL issued Field Assistance Bulletin 2012-02, explaining how the disclosure requirements apply to investments that are made available through an investment platform but are not specifically designated as investment options under the plan, such as a brokerage window or similar arrangement.
At first, the DOL had stated that if a certain number of participants select an investment that is not a designated investment alternative (DIA), including through a brokerage window, an affirmative obligation could arise to determine whether that investment should be treated as a DIA. But after concerns were raised, the DOL backed off and issued Field Assistance Bulletin 2012-02R, which removed the controversial prior guidance that could have characterized an investment selected by a few participants through a brokerage window as a DIA, the report explains.
The DOL, however, was still interested in whether additional guidance was needed to ensure that participants and beneficiaries with access to a brokerage window are adequately protected under ERISA. As such, the Department then issued a Request for Information in 2014 on the usage of brokerage windows in retirement plans, but ultimately did not issue any additional guidance.
Fast forward to today. The Council notes that it did engage in a significant amount of discussion regarding whether there was a need for the DOL to define exactly what constitutes a brokerage window. Some Council members thought that additional guidance would be helpful to the ERISA community—pointing to the Moitoso and Ramos cases as examples of what happens without a clearer definition (i.e., employers and others are subjected to the costs and uncertainty of litigation, with courts potentially issuing differing decisions on the subject).
Most Council members, however, did not believe that guidance in this area was needed. In this regard, the Council observed that the marketplace seemed to be functioning well. “Although not all plans offer brokerage windows, a sizeable percentage do, and, aside from the Moitoso case and the Ramos case, in which the court concluded that the platform at issue was a brokerage window and therefore not subject to the disclosure requirements of DOL Reg. Section 2550.404a-5, there was little indication that employers and others, in general, struggle with the question of what a brokerage window is,” the report states.
Moreover, many witnesses felt that the market has defined—and the ERISA community knows and understands—what a brokerage window looks like and how it is supposed to operate. To that end, the Council heard testimony about the importance of brokerage windows and the role they play in allowing employers to sponsor retirement plans that appeal to participants because they can customize their portfolios in ways that otherwise would not be possible under the standard investment lineup. For example, the EAC report points to participants who might want to invest in options that support specific policy goals, such as ESG, religious or other investing preferences, which was also the subject of a recent Cerulli report.
Still, one witness argued that brokerage windows are defined by what they are not rather than by what they are, and felt that it is important for the DOL to define exactly what is considered a valid “brokerage window/account” under ERISA.
BWO Plans
As for the recommendation regarding BWO plans, the Council notes that it heard testimony suggesting that there may be areas of potential concern regarding their use. “Financially inexperienced employees may be disadvantaged with a sub-optimal 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 report observes.
Another area of concern is when a BWO plan does not have a default brokerage window provider, which can be a barrier for financially inexperienced employees when deciding whether to participate in the plan, the report notes.
But because the Council was unable to obtain evidence directly indicating a problem with BWO plans, the Council notes that it was reluctant to make a recommendation that might adversely affect this business segment. In addition, most of the Council did not want to recommend guidance that could dissuade small employers from sponsoring retirement plans.
Instead, the Council recommended that DOL consider further fact finding that could take the form of an RFI asking interested stakeholders for data to determine whether any material problems exist and the impact of any potential regulatory approaches.
At the end of the day, however, it’s still up to the DOL to decide which path it wants to take.
