As mentioned in a previous blog post, the Department of Labor issued a set of frequently asked questions (“FAQs”) in May, 2012 that were intended to clarify certain aspects of the final regulations concerning participant level disclosure requirements for 401(k) plans. Significantly, one of the FAQs concerned self-directed brokerage accounts that are made available to participants under a retirement plan.
To briefly summarize, this FAQ, referred to as “FAQ 30,” was intended to clarify that, despite widespread belief to the contrary, fees related to self-directed brokerage options under a retirement plan were disclosable under the participant disclosure rules.
The DOL also noted that, in certain circumstances, investments selected by participants through brokerage windows or other investment platforms could become designated investment alternatives.
Essentially, if enough participants invested in certain investments through a brokerage window, it would be prudent for a fiduciary to treat such investments as designated investment alternatives under the plan. This would require fiduciaries to provide disclosures regarding such investments, as well as to monitor them on an on-going basis.
The position advocated by the DOL in FAQ 30 was a significant cause for concern for both plan sponsors and service providers. This appeared to be a new interpretation of the law that was not addressed elsewhere in either the Employee Retirement Income Security Act of 1974 (“ERISA”) and the DOL regulations. It also called into question whether such brokerage accounts could be offered under retirement plans in the future.
Specifically, the potential liability for plan sponsors would have been significantly increased, and the reporting obligations of service providers could have been prohibitive. In response, industry groups met with the DOL on several occasions to attempt to clarify the intent of FAQ 30.
In response to these concerns, the DOL issued a revised set of FAQs, which replaced FAQ 30 with a new FAQ 39. Significantly, FAQ 39 makes it clear that, for brokerage windows, disclosure is limited to plan level disclosure (for example, fees charged by the plan to use the brokerage window) and does not require investment-level disclosure (for any investments made by a participant through the brokerage window).
It also clarified that, for disclosure purposes, in order to be classified as a “designated investment alternative,” an investment option must be “specifically identified as available under the plan.” Based on the new guidance, it appears that for self-directed brokerage accounts offered under retirement plans, only plan level fees and services must be disclosed.
It is also worth noting that the DOL takes the position that plan fiduciaries have an obligation to monitor the brokerage window as part of their on-going ERISA fiduciary duties. Further, the DOL noted that it may be a breach of fiduciary duty under ERISA 404(a) to offer only self-directed brokerage, and no other investment choices, under a retirement plan.
This is notable, as some practitioners have posited that a plan sponsor could possibly avoid providing participant disclosures if the only investment option under a plan was a brokerage window. In FAQ 39, the DOL has made it clear that such a plan sponsor would still be required to provide participant disclosures and may, in fact, violate his or her fiduciary duties to plan participants by failing to offer a greater variety of investment choices.
Overall, this new guidance is welcome news for plan sponsors and most retirement plan service providers, as it provides some clarity on what is, and what is not, required to be disclosed related to brokerage windows.
However, it is also important for providers of brokerage windows to be aware of developments in this area. Note that the FAQs emphasize the fiduciary obligation to monitor the window as part of a fiduciary’s normal duties.
This will likely require a fiduciary to regularly review the services offered, and the fees charged, to participants investing in such brokerage windows through their retirement plan accounts. Providers of brokerage windows may wish to review the materials they currently provide to such plan sponsors to determine if such materials are sufficient to meet the needs of plan sponsors.
Note that sponsors will only be required to provide participants with plan level fees, and will, in most cases, receive that information from record keepers and other plan providers. To the extent more detailed information on the underlying fees and services is required under 408(b)(2), such information will need to come from the brokerage provider.
The DOL has promised that FAQs regarding 408(b)(2) are forthcoming and it seems likely that brokerage windows will be addressed in that guidance as well. In the end, brokerage window providers, whether they are covered by 408(b)(2) or not, may find that providing additional fee and service information to plan sponsors and participants is a valued service that clients will demand in light of the increased awareness of fees.
Of course, it is important to remember that, though beyond the scope of this blog, there are other bodies of law (such as securities laws) that may apply and may require additional disclosures as well.