Brokerage windows, while being offered in a larger number of retirement plans —or even as the sole retirement savings option—are already controversial. Even as they’re defended by the financial industry, the Department of Labor has them in its sights.

But some in the industry are more than a little concerned about them too.

And now a Vanguard study of its plans offering brokerage windows and the participants who use them shows that their appeal to participants might be limited—but very profitable for the limited demographic that relies on them.

While brokerage windows offer the opportunity for 401(k) participants to invest in options not included in the basic plan menu, they do so without the sponsor assuming any fiduciary responsibility—and leave the participant open to risky investments as well as high fees.

In addition, they can expose the sponsor to fiduciary liability if those fees are spread among participants who don’t use the windows in their accounts.

Given the lack of sophistication of the average American investor, a brokerage window could present not an opportunity, but a hazard to most people participating in a retirement plan.

The need for better understanding of the investments accessible through a window is beyond the skills of most workers, while the people who do use brokerage windows are often in particular professions, such as doctors and lawyers.

In December, Schwab data provided in comments to the DOL on the subject of brokerage windows indicated that, while more than 60 percent of the plans it services offer windows, just 4 percent of participants use them.

However, they still manage to account for 11.8 percent of plan assets.

Even more extraordinary is information from a new Vanguard paper that examined the self-directed brokerage feature in the plans it provides.

It found that, in 2014, 28 percent of Vanguard plan participants had access to brokerage windows—but only 1 percent actually used them. In fact, 10 percent of the firms offering brokerage windows had zero participants using them.

In addition, it said, 22 percent of the firms with access to brokerage windows were law firms, and “on average 7 percent of law firm assets were invested in brokerage.”

Brokerage window users are different from other plan participants in several ways, Vanguard said. “Brokerage participants are 6 years older, have more than twice the tenure, and are disproportionately male [80 percent male], compared with the Vanguard universe [59 percent male],” the paper said. “Brokerage participants contacted Vanguard much more frequently than all participants did—with a median contact rate of 66 times in 2014, compared with only 2 contacts in 2014 for all participants.”

However, here’s the kicker: “The most striking difference between brokerage participants and all participants is their account balances. The median brokerage account balance was $262,000—more than 8 times larger than the median Vanguard account balance of $30,000.”

Brokerage window participants, it said, invest an average of 45 percent of their account balances in the brokerage option. While larger plans are more likely to provide a brokerage window to their participants, “smaller firms have a higher proportion of plan assets invested in the brokerage option....” The brokerage allocation ranges from 10 percent or less (18 percent of brokerage participants) to more than 90 percent (15 percent of participants).

Instant Insights /

Brokerage windows don't profit all, but do profit some

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