Department of Labor Withdraws Controversial Guidance On Self-Directed Brokerage Accounts in 401(k) Plans

by Stinson Leonard Street - Employee Benefits & Compensation

[author: Jeffrey Cairns]

On May 7, 2012 the Department of Labor issued a set of questions and answers via Field Assistance Bulletin FAB No. 2012-02 ( concerning the new fiduciary fee disclosures in Labor Regulations §2550.408(b)-2 and participant fee disclosure requirements outlined in Labor Regulations §2550.404(a)-5. Q&A 30 of the May 7th FAB was extremely controversial as it created fiduciary oversight responsibility for plan sponsors offering open brokerage windows if it were determined that non-designated investment alternatives (certain mutual funds) available through a brokerage window are selected by significant numbers of participants and beneficiaries. In that instance it was suggested that plan fiduciaries had an obligation to examine these alternatives and determine whether one or more should be treated as a designated investment alternative for purposes of the participant disclosure requirements.

Similarly, with respect to individual account plans with only open brokerage arrangements (no designated investment alternatives endorsed or monitored by the plan fiduciary), the May 7th guidance suggested that if such a platform offered more than 25 investment alternatives, the plan administrator had an obligation to identify at least three of the investment alternatives with different risk and return characteristics meeting requirements of ERISA §404(c) as designated investment alternatives.  Then the plan fiduciaries would be required to provide the participant fee disclosures for any investment option with at least five participants and beneficiaries, or for plans with more than 500 participants and beneficiaries, those in which 1% or more of such participants and beneficiaries invested.

After a significant volume of negative comments and intense lobbying by benefit plan professionals, employers and Senate and Congressional Representatives, the Department of Labor withdrew Q&A 30 and reissued Field Assistance Bulletin No. 2012-02R (  In the revised FAB, Q & A 13 states that plan fiduciaries must provide information to participants and beneficiaries about the existence of self-directed brokerage accounts if offered by the plan, fees related to accessing that account and at least quarterly the amount of fees charged against participant’s account related to the self-directed brokerage account.

Q&A 30 in FAB 2012-02 was replaced with Q&A 39 which now asks “Is the platform or brokerage window, self-directed brokerage account or similar plan arrangement a designated investment alternative for purposes of the (fee disclosure) regulation?” The revised FAB A39 responds, “No” and clarifies that the plan fiduciaries are not required to provide any minimum number of designated investment alternatives and that self-directed brokerage windows are a permitted feature of individual account plans. The existence of a self-directed brokerage window does not impose additional fiduciary obligations on the plan sponsor than have traditionally been required under ERISA §404(a), i.e., the statutory duties of prudence and loyalty to participants and beneficiaries who use such a brokerage window or account and with the general oversight of the nature and quality of services being provided in connection with such an account. The last paragraph of the FAB suggests that there will be additional hearings and discussions and the possibility of additional amendments to the Regulations related to plan fiduciaries’ fiduciary duties with respect to such accounts. For the time being, plan sponsors can proceed with the preparation of the required participant fee disclosures without the additional requirements of the May 7th guidance. 

This does not mean, however, that plan fiduciaries are off the hook in overseeing open brokerage accounts. The general fiduciary requirements referenced above may still impose a duty to oversee participants’ use of these open accounts to prevent prohibited transactions and imprudent investments.  This “residual fiduciary duty” is similar to that which applies to plan sponsors’ selection of investment funds in 404(c) participant directed plans.  Although ERISA 404(c) provides protection of fiduciaries against losses due to participants’ choices in allocation among investment options provided, plan fiduciaries have an obligation to use prudence in selecting and monitoring funds selected as part of the investment array.

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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