Self-directed brokerage account windows in 401(k) plans have always been controversial. They may work well for many physicians’ or dentists’ 401(k) plans, but may not be appropriate in other 401(k) plans.

Recently the Department of Labor indicated it intends to provide additional guidance on the use of brokerage account windows. Experts believe it is likely to be unfavorable for proponents of brokerage windows because the DOL:

  • Has historically been concerned about whether unsophisticated users receive enough guidance to make sound investment choices. For example, some participants may end up choosing to invest in much higher cost retail share-class mutual funds because they have no idea there are different share classes.
  • Has previously expressed concern about an employer's fiduciary responsibilities when offering a brokerage account window. Continuing with the prior example, is it an employer's fiduciary responsibility to help participants select the appropriate mutual-fund share class?
  • Believes that plan sponsors should limit investment choices to a manageable number, rather than the entire universe which may be available through brokerage account windows. Again, from a fiduciary standpoint, how are participants who can't afford to purchase investment advice guided to the appropriate investment options?
  • Is especially concerned about whether it makes sense for employers to offer brokerage account windows as the only investment option. There are a lot of data showing that large numbers of investment choices paralyze and confuse most participants.

What is the likely outcome? Most experts think the DOL will:

  • Establish fiduciary guidelines and limitations for offering brokerage account windows;
  • Require more notices for plan participants who have access to brokerage account windows;
  • Bar their use as the only investment option in a retirement plan; and
  • Provide clarification on the manageable number of offerings issue raised in the Hecker vs. Deere case.

In short, the DOL is likely to make offering brokerage account window options in 401(k) plans more administratively burdensome and expensive.
Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC (lawtonrpc.com) a RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at bob@lawtonrpc.com or 414.828.4015.

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