Department of Labor Opens the Door to Questioning Brokerage Windows Under 401(k) Plans

by Dechert LLP

A request for information ("RFI") by the U.S. Department of Labor ("DOL") was published on August 21, 2014 regarding the use of so-called "brokerage windows" under retirement plans, such as many Section 401(k) plans, that allow participants (and beneficiaries) to direct the investment of their retirement accounts. In general terms, a brokerage window under a plan allows a plan participant to direct trading in a potentially wide variety of, among other things, stocks, bonds, mutual funds and other exchange-traded funds, and sometimes alternative investments as well. The RFI could signal an effort on the part of the DOL to promulgate additional regulatory requirements or other guidance applicable to the use of brokerage windows, with possible impact on plan sponsors that may offer windows under their plans and also on financial institutions that provide or facilitate the windows.

By way of background, the DOL finalized regulations in 2010 under which plan administrators were required to provide certain disclosures to plan participants relating to investment alternatives under participant-directed retirement plans. Then, in 2012, the DOL issued Field Assistance Bulletin (“FAB”) 2012-02, which addressed a number of questions relating to the new disclosure requirements.

In one provision of the original version of the FAB, the DOL took the position that specific investments that participants actually selected through a brokerage window could (if a “significant number” of participants were to select those specific investments) be considered “designated investment alternatives” subject to the new participant-level disclosure requirements. The DOL's approach could have materially increased the administrative responsibilities of plan administrators, arguably in unworkable ways.

In response to widely negative reactions to that provision of FAB 2012-02, the DOL replaced FAB 2012-02 with FAB 2012-02R. In the revised FAB, the DOL removed the statement described above and stated that a brokerage window is not itself a designated investment alternative. It did indicate, however, that a plan fiduciary’s “failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raises questions under [ERISA's] general statutory fiduciary duties of prudence and loyalty.” Further, in addition to its concern that plan sponsors might abdicate their responsibilities regarding the offering of plan investments by providing only a brokerage window and not offering any specific investment options, the DOL also appeared to be concerned, in light of certain judicial developments,1 that a plan sponsor might be able to avoid responsibility for offering sub-optimal investment options by offering a very large number of options.2

While the DOL in FAB 2012-02R chose not to impose additional requirements regarding brokerage windows in FAB 2012-02R, it indicated, in light of its concerns regarding brokerage windows, that it would continue to consider whether brokerage windows should be the subject of additional rulemaking. The DOL took a step toward addressing its concerns when it published the RFI. The DOL states in the RFI that the purpose of the RFI is to increase the DOL’s understanding of the prevalence and role brokerage windows play in participant-directed plans; why, under what circumstances and how often these brokerage windows are offered and used; and the legal and policy issues that relate to such usage.

The RFI presents 39 questions, which are organized into 10 categories. The topics covered include, for example, how the term brokerage window should be defined; the number and characteristics of plans offering windows; the frequency of their use and the demographics of the participants who typically use them; marketing, selection, monitoring and cost of windows and information availability to plan sponsors and disclosure of information to participants relating to the brokerage windows and the investments selected through them; the extent to which participants use investment advisers to assist them in selecting investments through a brokerage window; and the need for further regulation or other guidance on such matters.

Possible DOL rulemaking or other guidance on brokerage windows could have a wide-ranging effect. Among those potentially affected could be plan sponsors, recordkeepers who promote or liaise with brokers in making brokerage windows available to plan sponsors, brokers who offer or facilitate the use of brokerage windows, sponsors of funds that are offered through brokerage windows and privately offered or other alternative investments that plan participants might be able to access only through a brokerage window.

Comments must be submitted on or before November 19, 2014.

If you may be affected by additional regulatory action regarding the use of brokerage windows under participant-directed 401(k) or other retirement plans, you may want to consider whether you wish to comment in response to the DOL's RFI.


1) See, e.g., Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009) (“Hecker 1”), reh’g denied, supplemented by 569 F.3d 708, cert. denied, 558 U.S. 1148 (2010).

2) In Hecker 1, the court pointed to the fact that a plan offered approximately 26 specific funds, as well as a brokerage window under which participants could select from over 2500 funds, in holding in favor of the plan sponsor.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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