To a hammer, everything looks like a nail. To a bureaucrat, everything looks like a problem that needs to be solved by a new regulation, or new clarification (read “expansion”) of an existing reg. Bureaucrats justify their jobs by adding new regulations, or expanding the interpretations of existing regulations.
Case in point: The Labor Department's guidance on the responsibilities of sponsors of defined contribution plans with respect to brokerage windows, which allow participants the opportunity to invest outside the formal menu of options provided by the plan.
Because plan sponsors are responsible for carefully selecting and monitoring investment options, the options are necessarily limited in number and generally provide a diversified array of investment vehicles from conservative to moderately risky.
Occasionally, some DC plan participants — usually those who are more experienced at investing, often senior executives — are not satisfied with the menu provided by their employers and want to invest in options not offered by their plans. To satisfy those employees, some plan sponsors offer the brokerage windows.
Many sponsors and record keepers apparently believed that once they carefully selected a brokerage window provider, they were not required to monitor the investment choices participants made through those windows and/or to keep track of the fees and other costs.
Where could they possibly have gotten that idea?
Perhaps from the following paragraph in the regulation: Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans, published Oct. 20, 2010.
It says, in part: “Designated investment alternative means any investment alternative designated by the plan into which participants and beneficiaries may direct the investment of assets held in, or contributed to, their individual accounts. The term "designated investment alternative' shall not (emphasis added) include "brokerage windows,' "self-directed brokerage accounts,' or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan.”
Reading that paragraph, it would not be unreasonable for plan sponsors to assume that if they selected a brokerage window provider prudently, and monitored the service of that provider without monitoring the choices of individual participants, they were fulfilling their fiduciary duty, and nothing more was required.
Now, however, that appears to have changed under certain circumstances. According to the DOL guidance issued May 7, if the number of plan participants choosing specific investments in self-directed brokerage accounts crosses certain thresholds, these investments will be considered “designated investment alternatives,” even though the sponsor had no direct role in their selection. The plan sponsor must now monitor the investment choices made through the brokerage window and gather the fee and cost information and feed it back to the participants.
In a speech at the SPARK Institute conference, Phyllis Borzi, assistant secretary for the Employee Benefits Security Administration, said: “It is hard for me to imagine that people could say with a straight face, "This is new, we never knew.'”
It's hard to believe that Ms. Borzi could say with a straight face that the paragraph from the regulation quoted above does not at least sow confusion.
Ms. Borzi also said her agency addressed brokerage windows in plans after finding “a disturbing trend” among plan sponsors to avoid ERISA responsibility by “just giving choices,” presumably through the brokerage windows.
How many makes a “disturbing trend,” Ms. Borzi? Where is the evidence? Color us skeptical that this is an issue big enough to require this “clarification.”
Pension industry associations have warned their members that this clarification makes plan sponsors more vulnerable to fiduciary duty lawsuits from participants, apparently because the options in the brokerage windows can become “designated investment alternatives.”
According to pension experts, for plans with more than 500 participants, if less than 1% of a plan's participants are using a particular option in the brokerage window, no action is required, except that apparently the plan sponsor must continually monitor the number of participants using the option to see if the threshold is crossed.
If more than 1% is investing in a single option, then the plan sponsor must provide the same level of fee disclosure as required for the options the sponsor chose. (For other plans, it is as few as five participants.)
The problem is, providers do not have the systems to monitor or report individual investments and would have to pull the information manually, according to industry executives.
Who chose this 1% threshold and why? This is a ridiculously small number on which to increase a plan sponsor's fiduciary exposure. It means that if 101 participants in a plan of 10,000 participants choose an option, it then becomes a designated investment alternative.
Ms. Borzi and her colleagues at the DOL might find it difficult to believe, but most employers that establish retirement plans of any kind — defined benefit or defined contribution — do so in the interests of the employees. They attempt to manage those plans for the benefit of those employees. They are not trying to scam the employees.
They have voluntarily taken on significant financial and administrative burdens to help employees save for retirement. If regulatory burdens become too great, or too irritating, they can always terminate the plans. There is no law requiring employers to provide a retirement plan.
For some employers, a few more irritating “clarifications” such as this could be the straws that break the camels' backs, causing them to dispense with their defined contribution plans.
Most likely, the new clarification will dissuade some employers from adding brokerage options to their plans. It just adds to the hassle factor. Those employers should refer any employees who are unhappy about not having greater choice to Ms. Borzi's office. n