Fiduciary Obligations for a Brokerage Window in Retirement Plans

There has been a debate within the Department of Labor (DOL) about whether plan fiduciaries should be responsible for monitoring the brokerage window. According to DOL guidance issued in 2012, brokerage window investments could be subject to the investment disclosure requirements of participant-directed plans. However, due to concerns raised about the administrative burdens of monitoring and tracking brokerage window investments, the guidance was withdrawn, with a note that the DOL would be considering further guidance in this area.

The DOL did issue a request for information (RFI) about brokerage account practices in 2014 in anticipation of further rulemaking. However, they have not taken any further action. Nonetheless, there are fiduciary obligations related to offering the brokerage window that, if not met, could trigger liability.

Firstly, regulatory guidance indicates that the choice of the broker and negotiation of the broker's fees and other charges are fiduciary acts. Therefore, the selection of the broker and negotiation of the brokerage window arrangement should be undertaken in a prudent manner and documented accordingly.

Secondly, one question that comes up from time to time is whether the plan fiduciaries should consider the sophistication of the plan participants in deciding whether to provide a brokerage window. While there is no guidance on this specific issue, these types of concerns are the reason why many plans limit their brokerage windows to mutual funds.

Thirdly, the participant-directed plan disclosure rules require that disclosures regarding the brokerage window arrangement and the related fees and charges be provided to all plan participants eligible to use the window, not just those actually using it. This creates a fiduciary disclosure obligation for plan administrators.

Lastly, the brokerage account investment option is a separate "right or feature" that must be currently and effectively available to all participants under the plan. Therefore, if the participants who are using the brokerage account option are all highly compensated employees (HCEs), the employer should document that the brokerage account option has been effectively communicated to the non-highly compensated employees (NHCEs).

In summary, the DOL has been considering the question of whether plan fiduciaries should have some responsibility to monitor the usage of the brokerage window. While they have not taken any further action, there are fiduciary obligations related to offering the brokerage window that, if not met, could trigger liability. Plan fiduciaries should ensure that they undertake the selection of the broker and negotiation of the brokerage window arrangement in a prudent manner and document it accordingly. They should also provide disclosures regarding the brokerage window arrangement, related fees and charges to all plan participants eligible to use the window, not just those actually using it. Finally, if the participants who are using the brokerage account option are all HCEs, the employer should document that the brokerage account option has been effectively communicated to the NHCEs.