Request for Information Regarding Standards for Brokerage Windows in Participant-Directed Individual Account Plans
Federal Register, Volume 79 Issue 162 (Thursday, August 21, 2014)
[Federal Register Volume 79, Number 162 (Thursday, August 21, 2014)]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19832]
DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Parts 2520 and 2550
Request for Information Regarding Standards for Brokerage Windows
in Participant-Directed Individual Account Plans
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Request for information.
SUMMARY: The Employee Benefits Security Administration of the U.S.
Department of Labor (the Department) is publishing this Notice as part
of its review of the use of brokerage windows (including self-directed
brokerage accounts or similar arrangements) in participant-directed
individual account retirement plans covered by the Employee Retirement
Income Security Act of 1974 (ERISA). Some plans offer participants
access to brokerage windows in addition to, or in place of, specific
investment options selected by the plans' fiduciaries. Through these
arrangements, plan participants may be able to choose among the full
range of investment options available in the investment marketplace.
The Request for Information contained in this Notice will assist the
Department in determining whether, and to what extent, regulatory
standards or other guidance concerning the use of brokerage windows by
plans are necessary to protect participants' retirement savings. It
also will assist the Department in preparing any analyses that it may
need to perform pursuant to Executive Order 12866, the Paperwork
Reduction Act, and the Regulatory Flexibility Act.
DATES: Comments must be submitted on or before November 19, 2014.
ADDRESSES: You may submit written comments to any of the addresses
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: e-ORI@dol.gov. Include RIN 1210-AB59 (Brokerage
Windows RFI) in the subject line of the message.
Mail: Office of Regulations and Interpretations, Employee
Benefits Security Administration, Room N-5655, U.S. Department of
Labor, 200 Constitution Avenue NW., Washington, DC 20210, Attention:
``Brokerage Windows RFI.''
All submissions received must include the agency name and
Regulation Identifier Number (RIN) for this rulemaking. Comments
received will be posted without change to http://www.regulations.gov
and http://www.dol.gov/ebsa, and made available for public inspection
at the Public Disclosure Room, N-1513, Employee Benefits Security
Administration, 200 Constitution Avenue NW., Washington, DC 20210,
including any personal information provided. Do not include any
personally identifiable information (such as name, address, or other
contact information) or confidential business information that you do
not want publicly disclosed. Comments posted on the Internet can be
retrieved by most Internet search engines. Comments may be submitted
anonymously. Persons submitting comments electronically are encouraged
not to submit paper copies. All comments will be made available to the
FOR FURTHER INFORMATION CONTACT: Kristen Zarenko, Office of Regulations
and Interpretations, Employee Benefits Security Administration, (202)
693-8500. This is not a toll-free number.
Retirement plans that allow participants to choose investments for
their individual accounts typically offer a limited set of specific
investment options, which are selected and monitored by a plan
fiduciary. Some plans also offer brokerage windows, which enable
participants to select investment options beyond those specifically
designated by the plan fiduciary. In some cases, the brokerage window
may be offered in place of any designated investment options. The use
of brokerage windows and similar arrangements by participant-directed
individual account retirement plans (such as 401(k) plans) raises
important issues concerning ERISA's reporting and disclosure
requirements, as well as ERISA's fiduciary standards.
The Department addressed disclosure requirements for brokerage
windows in a regulation requiring plan administrators to disclose
certain plan and investment-related information to participants and
beneficiaries in participant-directed individual account plans (the
``participant-level disclosure regulation'').\1\ This regulation was
intended to ensure that all participants and beneficiaries in such
plans have the information they need to make informed decisions about
the management of their individual accounts and the investment of their
retirement savings. To that end, the regulation requires that, at least
annually, participants and beneficiaries are furnished a comparative
chart (or similar format) that contains information about the plan's
``designated investment alternatives.'' Plan administrators must, for
example, furnish fee, historical performance, and comparative benchmark
information for each designated investment alternative.
\1\ 75 FR 64910 (Oct. 20, 2010), codified at 29 CFR 2550.404a-5,
and including conforming changes to the Department's ``404(c)
regulation'' relating to plans that allow participants to direct the
investment of their individual accounts, at 29 CFR 2550.404c-1.
The regulation expressly provides that brokerage windows are not
``designated investment alternatives.'' \2\ As a result, plan
administrators are not required to disclose the detailed performance,
fee, and other investment-related information required with respect to
``designated investment alternatives.'' Instead, plan administrators
must provide ``a description of any `brokerage windows,' `self-directed
brokerage accounts,' or similar plan arrangements that enable
participants and beneficiaries to select investments beyond those
designated by the plan.'' \3\ In addition, the plan administrator must
provide an explanation of any fees and expenses that may be charged
against an individual account, on an individual, rather than on a plan-
wide, basis, in connection with the arrangement. Finally, participants
must be furnished a statement of the dollar amount of the fees and
expenses charged to their accounts in connection with the arrangement
during the previous quarter.\4\
\2\ The regulation defines a ``designated investment
alternative'' to mean: ``[A]ny investment alternative designated by
the plan into which participants and beneficiaries may direct the
investment of assets held in, or contributed to, their individual
accounts. The term ``designated investment alternative'' shall not
include `brokerage windows,' `self-directed brokerage accounts,' or
similar plan arrangements that enable participants and beneficiaries
to select investments beyond those designated by the plan.'' 29 CFR
2550.404a-5(h)(4) (emphasis added).
\3\ 29 CFR 2550.404a-5(c)(1)(i)(F).
\4\ 29 CFR 2550.404a-5(c)(3)(ii)(A).
Following publication of the participant-level disclosure
regulation, plan sponsors and administrators raised a number of
questions about the regulation, including how it applied to brokerage
windows. These questions concerned both the required disclosures for
brokerage windows as well as other fiduciary obligations that may arise
when a plan offers a brokerage window. In response, the Department
provided a series of ``frequently asked questions'' about the
participant-level disclosure regulation. These questions and answers
were published in Field Assistance Bulletin 2012-02R (FAB).\5\ FAB
Question 13 describes the information about brokerage windows that must
be furnished to participants and beneficiaries in order to satisfy
section (c)(1)(i)(F) of the regulation, which requires a
``description'' of the brokerage window. The FAB lists specific
information requirements, including instructions for participants on
how to use the plan's brokerage window, any restrictions on trading
within the brokerage window, and fees and expenses that may be charged
in connection with using the brokerage window (e.g., annual fees for
using the brokerage window feature, brokerage or other commissions for
trades within the brokerage window).
FAB Question 39 \6\ clarifies that a brokerage window is not itself
a ``designated investment alternative'' under a plan. The Department
also explains in Question 39 that a plan fiduciary's failure to
designate investment alternatives, for example, by offering no menu of
core investment options other than a brokerage window to avoid the
regulation's investment-related disclosure requirements, may raise
questions under ERISA's section 404 general statutory duties of
prudence and loyalty. The Department issued this cautionary statement
based, in part, on its observation that brokerage window features were
being marketed by some to plan fiduciaries as a device to avoid making
participant investment disclosures required under the regulation.
\6\ The original version of the FAB, which was rescinded and
replaced by FAB 2012-02R, included Question 30, which some viewed as
raising the possibility that plan fiduciaries could be responsible
under ERISA for the underlying investments into which participants
invest through a brokerage window. Further, some plan sponsors and
service providers stated that the Department should not have issued
Question 30 without prior notice and opportunity for public comment.
Although the Department disagreed, it withdrew the original FAB. The
revised FAB replaced Question 30 with Question 39, which is
described in this Notice.
The Department is aware that plan fiduciaries and service providers
continue to have questions about their duties under ERISA's general
fiduciary standards apart from the specific requirements of the
participant-level disclosure regulation. The Department is committed to
engage in discussions with interested parties to help determine how
best to assure compliance with these duties in a practical and cost-
effective manner. This includes considering whether amendment of
relevant regulatory provisions or interpretive guidance may be
appropriate and necessary to ensure that participants and beneficiaries
with access to brokerage windows are adequately protected.
Since issuance of the FAB, the Department has reviewed literature,
articles and other commentary available on the use of brokerage windows
in 401(k) plans. The Request for Information contained in this Notice
(the RFI) is the Department's next step in increasing its understanding
of this topic.
Some articles make the case that brokerage windows can be highly
attractive and suitable plan features for sophisticated investors.
These individuals assert that participants with a more advanced
understanding of the investment marketplace, including the various
costs and risks associated with investing in different types and
classes of securities, may benefit from brokerage windows and the
ability to create a better customized, more diverse portfolio.
Brokerage windows may, for example, provide access to a specialized
asset class or classes not available through the plan's core designated
investment alternatives. Sophisticated investors may be less likely to
overwhelmed by a large number of investment options and may benefit
from the flexibility that brokerage windows offer.
Some articles make the case that brokerage windows actually benefit
rank-and-file participants by indirectly limiting the field. These
individuals assert that many plans over time have increased the number
of designated investment alternatives they offer in response to demands
from company owner-employees, senior executives, and other potentially
sophisticated employee-investors for access to more diverse investment
opportunities. This results in some plans having a very large number of
designated investment alternatives, which may confuse less
knowledgeable participants. Making a brokerage window available to the
more demanding employees enables plans to offer a more manageable
number of designated investment alternatives to rank and file employees
who, according to those proponents of brokerage windows, have little or
no interest in investment opportunities beyond a basic set of
Other articles, however, counter that brokerage windows may present
undue risks for many retirement plan participants, because plan
fiduciaries do not engage in a deliberative process to affirmatively
review and select each of the investment options available through
brokerage windows. Thus, they say in the absence of a deliberative
review and selection process by an ERISA fiduciary, participants may
not have adequate or any protections against potentially costly or
unsuitable investments made through the brokerage window. Opponents
maintain, for example, that the same or similar investments often cost
more when selected through a brokerage window as opposed to when they
are designated by the plan. Brokerage window opponents maintain that
plans have no bona fide method to restrict brokerage window access only
to sophisticated participants, and that the use of dollar thresholds or
gateways, for example, may discriminate in favor of highly compensated
employees. Opponents further maintain that although it is permissible
to do so, brokerage window operators rarely limit the investments they
make available. Opponents also allege that in-plan investments often
subsidize the administrative costs of participants who opt to use the
B. Request for Information
The purpose of this RFI generally is to increase the Department's
understanding of the prevalence and role of brokerage windows in
participant-directed individual account plans covered by ERISA. In
particular, the RFI will focus on why, under what circumstances, and
how often these brokerage windows are offered and used in ERISA plans,
and the legal and policy issues that relate to such usage. The
Department wants to make sure that participants are not exposed to
undue risks from brokerage windows and that plan fiduciaries properly
understand the scope of their ongoing responsibilities with respect to
brokerage windows. The information received in response to this RFI
will assist the Department in determining whether, and to what extent,
regulatory standards or safeguards, or other guidance, are necessary to
protect participants' retirement savings. The RFI contains a number of
questions. Respondents need not answer every question, but should
identify, by its number, each question addressed. Interested persons
also are encouraged to address any other matters they believe to be
germane to the general topic of this RFI.
Defining ``Brokerage Windows''--Scope. The Department understands
that a variety of different plan and investment arrangements may be
encompassed by the terms ``brokerage window,'' ``self-directed
brokerage account,'' and similar arrangements. For example, open mutual
fund windows may permit participants to invest in hundreds or thousands
of mutual funds. More limited mutual fund windows or ``supermarkets''
may permit participants to invest in any mutual fund on one or more of
a particular vendor's platforms, but not necessarily every mutual fund
on the market. Other brokerage accounts also offer participants access
to a virtually unlimited number of individual stocks, exchange-traded
funds, and other securities.
1. What are the various brokerage window, self-directed brokerage
account, and similar arrangements that are made available in 401(k)
plans, and which one (or more) is the most common? What are the
benefits and drawbacks of these various arrangements?
2. If a more specific definition of a ``brokerage window'' is
provided, as a regulatory or interpretive matter, how should it be
3. Should the fiduciary, disclosure, or other standards that apply
to brokerage windows (and which are raised in more detail below) vary
depending on the type of arrangement, or perhaps the ultimate number of
investment options available to participants (e.g., a mutual fund
window that offers access to fifty mutual funds vs. an open brokerage
structure that offers access to many thousands of stocks, mutual funds,
and other securities) and, if so, how?
Plan Investment Offerings--Brokerage Windows and Designated Investment
4. What are the characteristics of plans that offer brokerage
5. Is the number of plans offering brokerage windows increasing,
decreasing, or remaining relatively constant? If the number is
6. What is a typical number of ``designated investment
alternatives'' offered by a 401(k) plan? Are plans increasing,
decreasing, or holding constant the number of designated investment
alternatives that they offer? If the number is changing, why?
7. Is there any correlation between the trends observed in the
preceding two questions, and if so, what is the correlation?
8. At what point might the number of investment options available
to plan participants warrant treating the options as a ``brokerage
window'' of some variety, rather than as a menu of ``designated
investment alternatives?'' Does the detailed investment-related
information required by the Department's participant-level disclosure
regulation for designated investment alternatives (vs. brokerage
windows) affect the answer to this question and, if so, how?
Participation in Brokerage Windows
9. How many participants, or what proportion of participants,
typically use their plan's brokerage window? What proportion of a
plan's total assets typically is invested through the brokerage window?
10. Do respondents have demographic data on these participants,
either for a particular plan or more broadly?
11. Of the participants that use their plan's brokerage window, do
these participants typically invest all of the assets in their plan
account through the window, or some proportion of their assets?
12. What types of restrictions, if any, are typically made on
brokerage window participation (e.g., minimum account balances, minimum
dollar amounts that may be transferred to a brokerage window, maximum
percentage of account balance that may be invested through a brokerage
13. Is there evidence of good or poor decision-making and outcomes
by those participants using brokerage windows? What types of evidence
14. What benefits accrue to participants that invest through
brokerage windows? Do participants who do not invest through the
brokerage window benefit from having a brokerage window option in their
plan, and if so, how?
Selecting and Monitoring Brokerage Windows and Service Providers
15. How many vendors does a plan fiduciary research or contact, on
average, when deciding whether to include a brokerage window feature?
How do vendors typically market brokerage windows to their existing or
potential plan clients?
16. Do plan recordkeepers typically require the use of their own or
affiliated brokerage services, or are plan fiduciaries able to shop for
brokerage windows provided by multiple vendors? Are there ways in which
brokerage window providers favor or encourage investment in proprietary
funds or products through brokerage windows?
17. What factors do plan fiduciaries consider and what challenges,
if any, do they face when deciding whether to include a brokerage
window and who should provide the window?
18. What are the most common reasons for adding a brokerage window
feature (e.g., flexibility and increased investment options for
participants, to facilitate the ability of participants to work with an
adviser or a managed account provider, etc.)? What role, if any, do
concerns about fiduciary responsibility or disclosure obligations play
in deciding whether to add a brokerage window?
19. When a plan fiduciary selects a brokerage window feature for a
plan, does the plan fiduciary typically enter into a contract for this
service, on behalf of the plan? If so, who are the parties to the
contract? If not, why not?
20. Do plan participants themselves commonly contract with the
vendor when they choose to participate in the brokerage window (either
in lieu of, or in addition to, a contract with a plan official) and, if
so, what role, if any, does a plan fiduciary play in this process?
21. What role, if any, do plan fiduciaries play in the selection of
brokers, advisers, or other service providers to a brokerage window?
How do plan fiduciaries monitor the performance of these service
providers if at all?
Fiduciary Access to Information About Brokerage Window Investments
22. How do plan fiduciaries monitor investments made through their
plan's brokerage window, if at all? For example, do plan fiduciaries
have access to information about specific investments that are selected
or asset class or allocation information?
23. Do fiduciaries view this information as important to
effectively monitoring the inclusion of a brokerage window feature in
their plan? If applicable, how often do plan fiduciaries request and
review such information?
24. What, if any, technological or other challenges exist that may
reduce the feasibility, or increase the cost, of compiling this type of
information for plan fiduciaries? Can respondents quantify such costs?
Brokerage Window Costs
25. What are the most common costs associated with participation in
a brokerage window (e.g., account fees, brokerage commissions, etc.),
and what dollar amounts are typically charged? Are there costs to
including a brokerage window that usually are borne by the plan sponsor
or by the plan, rather than by individual participants who use the
26. To what extent are brokerage windows effectively subsidized by
plan participants other than those participating in the brokerage
27. How do the costs of investing through a brokerage window
typically compare to investing in a plan's designated investment
alternatives? How do the costs compare to investing outside of the
plan, e.g., in an IRA?
28. How significant of a factor to plan fiduciaries are these costs
when deciding to add a brokerage window to their plan? How do plan
fiduciaries monitor or oversee the fees and costs of a brokerage
window, available investments, and related services? How much
discretion does a plan fiduciary have in negotiating brokerage
commissions and other costs that presumably cannot be controlled by
Disclosure Concerning Brokerage Windows and Underlying Investments
29. Is the information required to be disclosed about brokerage
windows by the Department's participant-level disclosure regulation
sufficient to protect plan participants? Is this required information
more or less than plans disclosed prior to the effective date of the
regulation? Does this information usually come from plan administrators
or from a third party, such as plan service or investment providers?
What additional information, if any, is or should be disclosed to
30. Is different or additional information disclosed to
participants after they elect to participate in a brokerage window and,
if so, what information?
31. The Department has said that disclosures regarding brokerage
windows or similar arrangements under the participant-level fee
disclosure regulation must, at a minimum, provide sufficient
information to enable participants and beneficiaries to understand how
the brokerage window works (e.g., how and to whom to give investment
instructions; account balance requirements, if any; restrictions or
limitations on trading, if any; how the brokerage window differs from
the plan's designated investment alternatives) and who to contact with
questions. See FAB 2012-02R at Q&A 13. Do these disclosures regarding
how the brokerage window differs from the plan's designated investment
alternatives typically include a description of the different risks and
costs of investing through a brokerage window compared to investing in
a designated investment alternative? Also, do the disclosures typically
include a description of differences in fiduciary duties owed to
participants investing through a brokerage window compared to investing
in a designated investment alternative?
32. In a recent report entitled, 401(k) PLANS: Improvements Can Be
Made to Better Protect Participants in Managed Accounts, GAO-14-310
(June 2014), the United States Government Accountability Office (GAO)
recognized that managed account or similar services could be available
to participants through brokerage windows. GAO recommended that the
Department, among other things, amend regulations under title I of
ERISA to require plan sponsors who offer managed account services to
provide participants with standardized performance and benchmarking
information on managed accounts. For example, one GAO suggestion is
that plan officials could be required to periodically furnish each
managed account participant with the aggregate performance of
participants' managed account portfolios and returns for broad-based
securities market indices and applicable customized benchmarks. To what
extent is the GAO recommendation feasible and advisable for
participants who access managed account services with or without a
The Role of Advisers
33. How often do plan fiduciaries engage advisers to assist with
about whether, and what type of brokerage window to include in their
34. How often do plan participants use an adviser or a provider of
managed account services to help them make investments through a plan
35. Do plans generally make advisers or managed account providers
available to participants for this purpose and, if so, do the advisers
or managed account providers typically contract with the plan or with
36. How often do plan participants independently select advisers or
other providers to assist with their investments through the brokerage
window? Are plan fiduciaries, recordkeepers, or other service providers
generally aware of these arrangements?
In connection with the issuance of FAB 2012-02 and FAB 2012-02R,
the Department became aware of the possibility that plan fiduciaries
and service providers have questions regarding the nature and extent of
ERISA's fiduciary of duties under section 404(a) of ERISA in connection
with brokerage windows in plans intended to be ``ERISA 404(c) plans.''
37. Do these questions indicate a need for guidance, regulatory or
otherwise, on brokerage windows under ERISA's fiduciary provisions? For
instance, is there a need to clarify the extent of a fiduciary's duties
of prudence, loyalty, and diversification under section 404(a) of
ERISA, both with respect to brokerage window itself, as a plan feature,
and with respect to the investments through the window? If guidance is
needed, please try to identify the precise circumstances in need of
guidance. If no guidance is needed, please explain why not.
Annual Reporting and Periodic Pension Benefit Statements
38. The annual reporting requirements contain a special provision
for plans with brokerage windows. Specifically, subject to certain
exceptions, the Schedule H allows plans to report certain classes of
investments made through a brokerage window as an aggregate amount
under a catch-all ``other'' category rather than by type of asset on
the appropriate line item from the asset category, e.g., common stocks,
mutual funds, employer securities, etc. Should this special provision
be changed to require more detail and transparency regarding these
investments? If so, what level of transparency is appropriate, taking
into account current technology and the administrative burdens and
costs of increased transparency?
39. ERISA section 105 requires plans to furnish benefit statements
at least quarterly in the case of participant-directed individual
account plans. How do these benefit statements typically reflect
investments made through brokerage windows?
Signed at Washington, DC, this 7th day of August 2014.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 2014-19832 Filed 8-20-14; 8:45 am]
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