Information on brokerage windows requested by DOL

On August 20, 2014, the Department of Labor released a request for information (RFI) concerning brokerage windows in 401(k) plans. The RFI includes 39 questions covering definitional issues, plan offerings, participation, selection, information available to fiduciaries, costs, disclosure, the role of advisors, fiduciary duties and reporting.

In this article we begin by reviewing the brokerage window issue generally and then discuss the RFI.

Regulatory background

Generally, brokerage windows (or ‘self-directed brokerage’) allow participants to invest in funds or securities that are not part of the plan’s ‘main menu.’ One issue raised in the RFI is what is exactly meant by ‘brokerage window.’ As the RFI states:

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.

The RFI covers all of these arrangements, although DOL indicated that any future guidance may distinguish between different arrangements.

In the sponsor-to-participant fee disclosure regulations adopted in 2010, brokerage windows were, in effect, exempted from many disclosure requirements:

The regulation expressly provides that brokerage windows are not “designated investment alternatives.” 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.” 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.

DOL got some questions about what this language actually meant. In 2012 it published FAQs that, among other things, addressed brokerage windows. That guidance (contained in Q&A 30) was very controversial. As DOL describes it, “some viewed [Q&A 30] as raising the possibility that plan fiduciaries could be responsible under ERISA for the underlying investments into which participants invest through a brokerage window.”

That guidance was withdrawn in favor of a new Q&A 39 which “clarifies that a brokerage window is not itself a ‘designated investment alternative’ under a plan.” DOL did state, however, 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 fiduciary rules].”

Literature critical of brokerage windows

More recently, after a review of related literature, DOL has identified other issues with respect to brokerage windows. According to DOL, critics suggest that:

[B]rokerage 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. … [T]he 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 brokerage window.

Thus, it is in the context of a specific concern about ‘window-only’ plans, and more general concerns about brokerage windows identified in some of the related literature, that DOL has released this RFI, as the beginning step in a process that may ultimately result in a regulation or other guidance.

The utility of brokerage windows

Why do sponsors offer brokerage windows at all? In its review of related literature, DOL also discussed the positive function a brokerage window may serve in a 401(k) plan:

Some articles make the case that brokerage windows can be highly attractive and suitable plan features for sophisticated investors. … [P]articipants with a more advanced understanding of the investment marketplace … may benefit from brokerage windows and the ability to create a better customized, more diverse portfolio. …

Some articles make the case that brokerage windows actually benefit rank-and-file participants by indirectly limiting the field. … [P]lans 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 ….

Thus, a brokerage window can (1) allow plan participants who are sophisticated investors (including, e.g., participants using an account manager/advisor) access to investments not otherwise available and (2) deal with pressure from senior executives to increase the number of fund options available in the ‘regular’ fund menu.


The RFI presents an opportunity for sponsors (and other interested persons) to provide DOL with information about how brokerage window programs work in practice, how useful they are and what problems they present. Respondents do not have to answer every question, and thus can concentrate on issues of particular concern.

We are not going to review all 39 questions, but we will discuss some that are particularly interesting:

Q&A 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?

In other words, how many choices – mutual fund supermarket? full brokerage? – must a plan offer to get the relief from ERISA section 404 disclosure requirements available to brokerage windows?

Q&A 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 window, etc.)?

Q&A 13. Is there evidence of good or poor decision-making and outcomes by those participants using brokerage windows? What types of evidence are available?

The issue of how to limit access to windows to those who are sophisticated enough to assess the risks and costs of the wide variety of investments is a concern for many sponsors, as well as DOL. As noted above, Tax Code nondiscrimination rules may prevent limits based on income or account size.

Q&A 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?

Sponsors responding to the RFI who provide a window will want to make the case for why windows are good for participants.

Q&A 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?

These questions, about the role fiduciary issues play in adopting a window, are somewhat loaded. The availability of a brokerage window was a key element in the sponsor’s successful defense in Hecker v. Deere of claims that it violated ERISA fiduciary rules with respect to fees and fund menu construction. We know that the DOL strongly opposes that view.

Review by counsel

Sponsors will generally want to review any response to the RFI with their counsel. Certain answers should be reviewed very closely, including Q&As 15-21 (questions about the process used by plan fiduciaries in selecting a brokerage window provider), Q&As 22-24 (about fiduciary access to information about brokerage window investments) and Q&As 25-28 (about costs).

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As we said at the beginning, this RFI is the first step in a process that may or may not result in official guidance. That process is likely to take a long time. Sponsors committed to providing a brokerage window may wish to respond to some or all of the questions in the RFI.