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  • Writer's pictureNicholas Zaiko, CIMA

Self-Directed Brokerage Accounts

Many defined contribution plan administrators offer brokerage window options. If a plan sponsor decides to add this feature, the brokerage window should be made available to all participants. The plan sponsor cannot discriminate among participants by offering this only to HCEs.

A participant’s brokerage account can be managed by an independent third-party financial advisor. Participants can designate their personal financial advisor and authorize them to link directly to the participant’s brokerage window account to manage those assets.

DOL Guidance

In June, 2021 the DOL ERISA Advisory Council started examining how brokerage windows are designed for different DC plans and used by participants. The ERISA Advisory Council might recommend that the DOL issue guidance “to ensure that plan participants and beneficiaries with access to a brokerage window are adequately informed and protected under ERISA.”

In 2012, the DOL published Field Assistance Bulletin 2012-02R that clarified what information about brokerage windows must be included in the disclosures 401(k) participants receive. The guidance did not cover fiduciary standards.

ERISA Industry Committee (ERIC) Brokerage Window Survey

The ERISA Industry Committee(ERIC) represents large employers, nationally and across industry sectors, that sponsor ERISA retirement and benefit plans for their workforce. Their survey on Brokerage Window Usage in 401(k) Plans was presented to the Department of Labor, Washington, D.C. on June 25, 2021. The survey found the following:

  • The survey found 61% of member companies provide a brokerage window as part of their plans’ investment lineups. Three-quarters said they do so to expand available investment options under the plan.

Reasons given for providing the brokerage window include:

  • 75% - Expand available investment options in the plan

  • 9% - Decrease in core investment options

  • 16% - Participant requests

Participants that have access to a brokerage window:

  • 88% - of all participants

  • 12% - participants with a minimum account balance

Restrictions placed on the brokerage window

  • 61% - No employer stock

  • 58% - No options

  • 58% - No investment that could generate Unrelated Business Income Tax

  • 18% - Maximum % of participant’s total account balance

Percentage of Participants that use brokerage window:

  • 0-2%: 24% of Plans

  • 3-5%: 28% of Plans

  • 6-10%: 21% of Plans

  • 11-15%: 3% of Plans

  • 16%+: 10% of Plans

  • Other: 14%

39% of plans do not offer a brokerage window for the following reasons:

  • 26% - additional investments are not needed

  • 17% - not suitable for participants

  • 30% - concerns over fiduciary liability

There was greater use of the brokerage window by participants who work in finance, investing, doctors, lawyers and engineering. Those participants that use the brokerage window tended to have higher account balances than the plan’s median.Professional organizations such as doctors and law firms permitted 90% - 100% of the participants’ balances in a brokerage window. A high percentage of those participants allowed outside personal financial advisors to access their brokerage window account to advise and manage the retirement assets.

Participant Disclosures

All the respondents make clear disclosures that the brokerage window is not subject to the fiduciary protections of the other in-plan investment options and that investments within the brokerage window are the complete liability of the participant.

Under current guidance, plan sponsors must provide participants with sufficient information to understand how the brokerage window works, explain any fees and expenses that may be charged against the participant’s account, and a statement of the dollar amount of fees charged.

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