Jun 19, 2012

DOL Fiduciary Alert: 401(k) Plan Brokerage Windows

In May, the Department of Labor (the “DOL”) released guidance regarding the new participant-level fee disclosure rules under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), in the form of FAQs. The February 3, 2012, the October 25, 2010 and July 16, 2010 SGR Client Alerts addressing the fee disclosure rules can be accessed on our website. Question 30 of the FAQs addressed “brokerage windows.” A brokerage window allows 401(k) plan participants to invest a portion of their account outside of the investment funds offered by the plan.

According to recent speeches made by Phyllis C. Borzi, Assistant Secretary of Labor for the Employee Benefits Security Administration of the DOL, Question 30’s purpose is to:

  1. address the practice of attempting to avoid fiduciary liability under ERISA by offering brokerage windows; and
  2. remind plan sponsors and fiduciaries of their fiduciary responsibility under ERISA to prudently select and monitor the investment choices that they offer participants.

What has caught plan advisers off guard is that the DOL is appearing to take the position that plan sponsors and fiduciaries have a duty under ERISA to monitor and review the investment selections that participants are making through brokerage windows in their 401(k) plans-not just the investment funds offered by the plan. In addition, according to Borzi, if a majority of participants are selecting the same investment options through the brokerage window, plan sponsors and fiduciaries should consider adding such options to the plan’s portfolio as designated investment alternatives. Based on the FAQs and Borzi’s comments, it appears that fiduciary responsibility and potential liability has increased for plan sponsors and fiduciaries that offer brokerage windows through their 401(k) plans.

Additional guidance, which is anticipated to address these issues in further detail, is anticipated in the form of a second set of FAQs, but not before the July 1, 2012 effective date. Until such guidance is released, we recommend that plan sponsors with 401(k) plans that offer brokerage windows do the following:

  1. contact their investment advisers to inquire how such advisers can provide them with the necessary information to review and monitor the investments that their participants are selecting through the brokerage windows;
  2. consider whether they want to continue offering such brokerage windows; and
  3. discuss this issue at their next investment committee meeting and document their analysis and decisions.

In addition, we recommend that any plan sponsors currently considering adding a brokerage window to their 401(k) plan wait until further guidance is released.

A copy of the FAQs (which were issued in DOL Field Assistance Bulletin No. 2012-02) can be obtained by clicking here.

For more information, please contact your SGR Executive Compensation and Employee Benefits Counsel.

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