By Mark Miller
CHICAGO, June 7 Can you fly the coop on your
company's 401(k) plan if you don't like its investment choices?
A growing number of plans offer a "brokerage window" that lets
retirement savers sidestep the standard investment menu and
access a much larger number of mutual funds or stocks offered by
their plan providers.
But plan providers are complaining after the U.S. Department
of Labor (DOL) released unexpected new rules for plan sponsors
that cover brokerage window. The regulatory "guidance" is part
of a broader document dealing with important new rules that take
effect this summer requiring greater transparency of the fees
that participants are charged.
Brokerage windows occupy a small corner of the 401(k) world,
but they are gaining in popularity. Twenty-nine percent of plans
offered a brokerage window last year, compared with just 12
percent in 2001, according to consulting firm Aon Hewitt. But
just 6 percent of workers at companies offering a brokerage
window use them.
Most are higher-income investors who do not want to be
limited by mutual fund choices vetted by plan sponsors. By
opening up a brokerage account, these investors can pick from a
much wider array of choices available through the plan's service
provider. Aon Hewitt's survey data shows that 10 percent of
participants who make over $100,000 use brokerage windows, while
6 percent of those making $40,000 to $60,000 use the accounts.
Jumping through the brokerage window also can mean lower
fees and better investment choices for employees stuck in
high-cost plans with mediocre fund options. About half of
brokerage windows restrict investing to mutual funds, with the
rest allowing investment in individual stocks, Aon Hewitt says.
Brokerage windows typically come with a small annual fee of
around $150, plus trading fees.
Under the new rules, which go into effect at the end of the
summer, plan sponsors would be required to track the investments
made by individuals in their brokerage accounts. If more than 1
percent of all plan participants invest in a single fund or
stock (or five investors at plans with less than 500
participants), that investment would cross a threshold that
requires the disclosure of information about the investment to
Plan sponsors also would have to consider whether the
investment should be endorsed as an mainline choice for all plan
participants. The threshold isn't likely to be crossed often in
large plans, but sponsors still would be saddled with the
monitoring and compliance requirements.
The Labor Department guidance is motivated by concern that
brokerage windows leave plan participants without a clear,
manageable menu of investment choices. But sophisticated
investors likely are jumping through the window with full
knowledge of the added risk they're taking. Industry sources say
the DOL is especially concerned about abuses among very small
plans that elect to give all workers self-directed accounts as a
way of side-stepping fiduciary responsibilities to provide a
vetted set of investment choices.
"Typically, what you find is a group of doctors, dentists or
lawyers who don't want to be limited to a small menu of choices.
They want the sharp tools," explains Jason Roberts, CEO of the
Pension Resource Institute, which provides consulting and
training services to retirement plan service providers. "Maybe
they want a menu of sector funds that probably aren't
appropriate for their administrative staff, so to avoid the
fiduciary liability of an overly-aggressive menu of investment
choices, they just give everyone at the company a brokerage
window. They're on their own."
Plan service providers say they've been blindsided by the
brokerage window guidance. It came last month without advance
warning and requires the development of new technical
infrastructure for account tracking and reporting by August 30,
the deadline for implementation of the new fee reporting
"Service providers haven't created the infrastructure to
track investments through brokerage windows, show what's being
bought on comparative charts, and monitor for investments that
cross the threshold," says Howard Heller, manager of legislative
and regulatory strategy for T. Rowe Price Retirement Plan
Another concern: Under these rules, plans that have
diligently vetted and picked a menu of investment choices could
find themselves forced to determine whether participants'
investment picks in the brokerage window should be added to the
plan's menu of official "designated" plan choices.
"Let's say there's a sector mutual fund that is a real rock
star in the market," says Alison Borland, vice president of
retirement product strategy at Aon Hewitt. "If 1 percent of the
plan participants invested in that fund, the plan sponsor would
have to disclose and review it for possible inclusion in the
"Even though it's a great fund, it might be inconsistent
with the investment policy that has been set by the plan's
investment committee. The committee would have to either remove
it as an investment option from the plan, or change its
investment policy statement to allow for its inclusion."
Heller says industry trade groups are talking with the
Department of Labor about the guidance and he expects "further
clarification" that might help ease the industry's concerns.