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DOL Questions 401(k) Brokerage Windows

This article is more than 9 years old.

Should you be able to invest in pretty much anything in your 401(k) retirement account? That’s what a brokerage window, also known as a self-directed brokerage account, lets you do, but the Department of Labor is once again questioning whether it’s helpful or harmful to investors saving for retirement and whether employers should be on the hook for employees' actions.

Some 401(k)s allow plan participants access to brokerage windows in addition to the basic line-up of investment choices. For a nominal annual fee, typically $100, you can choose among thousands of different mutual funds and usually exchange-traded funds and individual stocks, too.

The nanny state position is that employees will make dumb mistakes if given free reign to invest their 401(k) money. The alternate view is that a brokerage window gives investors the ability to build a bigger, better retirement nest egg. Are new safeguards needed? That’s what the DOL wants commentators to hash out this fall in response to its request for information regarding standards for brokerage windows. The DOL says it wants to make sure that employees are not exposed to undue risks from brokerage windows and that employers properly understand the scope of their ongoing responsibilities with respect to brokerage windows.

In 2013, 40% of large and midsize employers offered brokerage windows, up from 18% in 2007, according to benefits consulting firm Aon Hewitt. While only 4% of workers with access to windows use them, those who do tend to be senior-level management, higher-salaried and longer-tenured, with big balances. Some 8.3% of workers making $100,000-plus use brokerage windows compared to 3.6% for those making $60,000 to $79,000, Aon reports.

The DOL wants to know more about brokerage window costs, the role of advisers, and employers' fiduciary duties. Some sample questions: Is there evidence of good or poor decision-making and outcomes by those participants using brokerage windows? How do plan fiduciaries monitor investments made through their plan’s brokerage window, if at all? To what extent are brokerage windows effectively subsidized by plan participants other than those participating in the brokerage window?

Employers are adding brokerage windows because senior management is demanding them, says Rob Austin, director of retirement research at Aon Hewitt in Charlotte, N.C. “People say, “I want different options,’” he says. Historically, 401(k)s have offered a core line-up of funds, and then target-date funds came along for those employees who needed hand holding. Brokerage windows appeal to do-it-yourselfers and to employees who work with an investment adviser to handpick investments. Some employees want to be in a particular fund or sector that’s not available in the 401(k) plan like a publicly-traded REIT or a gold fund. Others want to go all passive and choose a brokerage window for more passive investment options than their 401(k) plan offers.

In addition to the annual fees that might be assessed for using the brokerage window (Aon Hewitt found that 60% of employers with windows charge annual maintenance fees), there are also usually commissions for trades within the window. Another factor to consider is that similar investments may cost more through a brokerage window because you lose the wholesale purchasing power of a 401(k)—you’re buying retail.

Two years ago, after employer backlash, the DOL withdrew proposed guidance that would have required employers to vet a fund for prudence and fees if only 1% of employees picked that fund through a brokerage window. Depending what kind of response it gets to the request for information, the DOL could re-propose that guidance or propose more onerous requirements.

If you feel strongly about your choice for a brokerage window, you can send in comments via email to e-ORI@dol.gov (include “RIN 1210-AB59 Brokerage Windows RFI” in the subject line of the message) through Nov. 19, 2014. The request for information is available here.