How Much is that (Investment) in the Window…A Higher Level of Fiduciary Oversight Could be Required for 401(k) Plan Brokerage Windows

/in , , , , , , , , ,

by Brenda Berg

Fiduciaries of 401(k) plans and other retirement plans know that they must prudently monitor the investment options available to participants in the plan, but are they monitoring participants’ investments made through a plan’s brokerage window? Recent commentary from the Department of Labor (DOL) on cryptocurrency investments suggests maybe fiduciaries should be – and that the DOL may check in on that soon.[i]

A “brokerage window” or “self-directed brokerage account” can allow participants access to a broad array of investments beyond the regular investment menu under the plan. Most plan fiduciaries have not paid much attention to the actual brokerage window investments. This is not surprising given the DOL’s relative lack of focus on the matter. The DOL had issued guidance in 2012 that the investment disclosure portion of the fee disclosure rules could apply to brokerage window investments in certain cases but after pushback due to the administrative burdens, the DOL withdrew that guidance. In 2014 the DOL issued a Request for Information about brokerage window practices but no further guidance was issued.

Now the DOL has given us a clue that it might finally be prepared to press the issue of the fiduciary’s role with respect to brokerage windows. In the DOL’s warning that it would examine plans offering investments in cryptocurrency, the DOL stated: “The plan fiduciaries responsible for overseeing such investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above.” Compliance Assistance Release, 2022-01 (emphasis added). This statement suggests that the DOL views that plan fiduciaries have a fiduciary obligation to at least limit certain investments available through a brokerage window, if not necessarily an obligation to monitor the investments.

It is unclear whether fiduciaries have a duty to review the specific investments participants make through the brokerage window (including issues such as whether fees are reasonable). Arguably there is no such duty because the duty to monitor only extends to “designated investment alternatives.” Since brokerage windows are not designated investment alternatives (as made clear under the DOL participant fee disclosure rules) then one could argue there is no duty to monitor the investments. This position hasn’t been tested, since there has been only limited litigation relating to brokerage windows and courts have hesitated to conclude there is a fiduciary duty to monitor brokerage window investments.

However, even if there is no duty to monitor the individual investments, plan fiduciaries are still bound by ERISA’s duty of prudence and should take into account the nature and quality of services that will be provided in connection with the brokerage window, and whether to offer the window at all. The DOL’s recent commentary regarding cryptocurrency in the brokerage window may be suggesting that the fiduciaries also have duties regarding the design of the window and imposition of limits on available investments.

Some of the other issues that fiduciaries may want to consider when structuring a brokerage window are:

  • Should investments in the brokerage window be limited in any way? Restrictions might include the type of investments (such as cryptocurrency or other higher risk investments, employer stock, and investments otherwise available under the plan) or a percentage limitation.
  • Are participants sufficiently educated with respect to the brokerage window?
  • Is the brokerage window available to a nondiscriminatory group of participants?
  • Are plan recordkeeping fees fairly allocated across the assets/accounts of participants investing through the brokerage window as well as other options?
  • How do the fiduciaries monitor and properly handle any prohibited transactions or unrelated business taxable income?

Just a few months ago in December 2021, an advisory panel to the DOL, the ERISA Advisory Council, issued a report of its findings about the current status of brokerage windows and any recommendations to the DOL. The Council did not recommend that the DOL issue guidance or impose additional requirements for brokerage windows at this time. Perhaps the DOL’s comment in the cryptocurrency guidance is a hint that the DOL doesn’t intend to follow that direction. Plans offering brokerage windows should stay alert.

[i] See our blog discussing the cryptocurrency guidance here: https://www.employeebenefitslawblog.com/cant-touch-this-dol-discourages-plans-from-investing-in-cryptocurrency/.