NEW YORK | Mon Jul 30, 2012 5:29pm EDT (Reuters) – The Labor Department this week issued guidance on rules requiring companies to disclose 401(k) fees to employees that will be welcome news to most employers. But for some small companies with 401(k) plans, the guidance may raise more questions, experts said.
Under DOL regulations, employers have to provide fee information by August 30 to employees on every “designated investment alternative,” or investment choice they offer in their 401(k) plans.
That requirement became more complicated when in May, in response to questions from plan sponsors, the DOL published guidance about complying with the rules when it comes to brokerage windows or self directed brokerage accounts. Some 401(k) plans offer brokerage windows, alongside other investment choices in their plans, to enable employees to invest in thousands of different investment vehicles, such as mutual funds and individual securities.
Under previous rules, employers are not responsible for monitoring the investments within these brokerage windows, but are responsible for the investment choices they put in their plans for employees.
But in its May guidance, the DOL said employers would have to monitor and disclose not just fees on the investments they offer within their plans, but also on the investments within their brokerage windows.
That was met with vehement opposition from plan sponsors and providers because it was the first time the agency stated that employers could be held responsible for overseeing the investments within their brokerage windows.
“It was a complete departure from everything the agency has said in the past about self-directed brokerage accounts,” said Lori Lucas, the defined contribution practice leader for Callan Associates, a consultant to retirement plans.
On Monday, however, the DOL clarified its position, stating that employers would not be held liable for monitoring and disclosing the fees of all the investments within those windows. If a plan does not have “designated investment alternatives,” the DOL added, that would “raise questions” about its “fiduciary duties of prudence and loyalty.”
While most mid- to large-sized 401(k) plans with brokerage windows offer a number of other investment choices, many small plans – particularly those with professional employees, such as lawyers or doctors – only offer brokerage windows, experts said. Those firms may now have to rethink their plan design or risk getting in trouble with the DOL, they said.
Smaller companies might have to rethink whether they need to expand the offerings in their 401(k) plans, Lucas said.
There has always been some ambiguity around offering self-directed brokerage windows and what the employer’s fiduciary responsibility is overseeing them. This guidance raises more questions for companies that only offer self-directed brokerage windows in their plans, she said.
“If I were in their shoes I would want greater clarity on what this means,” she said.
(Reporting By Jessica Toonkel; Editing by Neil Stempleman)
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