DOL rule threatens DC plan brokerage windows

The Labor Department's attempt to clarify upcoming defined contribution fee-disclosure regulations amounts to creating a new regulation for brokerage accounts without using the proper process, industry experts say.

“This is coming out of left field,” said Edward Ferrigno, Washington-based vice president for Washington affairs at the Plan Sponsor Council of America. He was referring to a May 7 DOL guidance document that discusses brokerage accounts and other elements of new rules affecting fee disclosure between sponsors and participants.

“This is breaking new ground that hasn't been discussed before,” said Larry Goldbrum, Washington-based general counsel for the SPARK Institute. Messrs. Goldbrum and Ferrigno agreed the guidance could discourage plans from adding brokerage windows to their DC investment lineups.

Other industry experts say the DOL comments on self-directed brokerage will cause more paperwork, cost, confusion and fiduciary responsibility for sponsors.

The Labor Department's timing is troublesome because Aug. 30 is the compliance deadline for rules affecting fee disclosure between sponsors and participants. “It was certainly a big curveball, and we certainly don't want curveballs at this stage,” Mr. Ferrigno said.

Industry participants say the DOL's latest discussion of brokerage windows creates confusion when matched with rules on “designated investment alternatives” in the Employee Retirement Income Security Act. A “designated investment alternative” is any investment identified by a plan fiduciary — such as a collection of core funds — into which participants and beneficiaries can place their money.

The DOL guidance, called a Field Assistance Bulletin, reaffirmed that a brokerage window by itself is not a designated investment alternative. Nor is a self-directed brokerage account or any “similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan.”

DC experts argue that other wording in the document indicates individual funds or stocks within the brokerage windows could be considered designated investment alternatives if a certain number of plan participants put their money into them.

The DOL has “introduced a new concept — the idea that an investment available in a self-directed brokerage account might need to be treated as a designated investment alternative without a fiduciary ever having designated it,” said Jennifer Eller, a principal with Groom Law Group, Washington, who specializes in fiduciary responsibility. “This is a designated investment alternative by people voting with their feet.”

The DOL guidance identified criteria for an investment within a brokerage window or similar plan to be considered a designated investment alternative: “Pending further guidance in this area, when a platform holds more than 25 investment alternatives, the department ... will not require that all of the investment alternatives be treated ... as designated investment alternatives if the plan administrator:

• ”makes the required disclosures for at least three of the investment alternatives on the platform that collectively meet the "broad range' requirements in ... ERISA”; and
  


• ”makes the required disclosures with respect to all other investment alternatives on the platform, in which at least five participants and beneficiaries, or, in the case of a plan with more than 500 participants and beneficiaries, at least 1% of all participants and beneficiaries, are invested on a date that is not more than 90 days preceding each annual disclosure.”

And if “significant numbers” of participants and beneficiaries choose specific investments offered in a brokerage window, the plan fiduciary has an “affirmative obligation” to examine these investments to determine if they should be treated as designated investment alternatives, the document said.

“The fiduciary obligation to designate a manageable number of investment options is a critical part of making these retirement plans work for America's workers,” said DOL spokesman Michael Trupo. Evaluating brokerage windows is “critical,” Mr. Trupo said in an e-mailed response to questions.

Financially unsophisticated participants “may need guidance when choosing their own investments from among a large number of alternatives,” he wrote. “Designating specific investment alternatives also enables participants and beneficiaries ... to compare the cost and return information for the designated investment alternatives when they are selecting and evaluating alternatives.”

DC industry officials, however, said the DOL has gone too far.

“It seemed like a solution in search of a problem,” said Ms. Eller of Groom Law Group. “Beyond clarifying the rule's application to brokerage windows, it didn't seem necessary for the Labor Department to address this issue at all.”

The new DOL document “deviates significantly from current regulatory guidance by imposing fiduciary responsibility” on sponsors when participants choose investments in self-directed brokerage accounts, Jennifer Engle, a spokeswoman for Fidelity Investments, Boston, said in an e-mailed response to questions.

“Plan sponsors are expressing serious concerns about (the DOL document) and the lack of clarity about how they should respond,” she added.

Self-directed brokerage windows continue to gain popularity. According to periodic surveys by Aon Hewitt, Lincolnshire Ill., 29% of defined contribution plans offered self-directed brokerage windows in 2011, steadily increasing from 12% in 2001 when the firm began tracking them. In plans for which it was offered, this investment option accounted for an average 6% of total plan assets last year.

“Now, in certain circumstances, plan sponsors have to dedicate resources (to) tracking how many people invest in those (brokerage window) funds,” said Alison Borland, vice president for retirement product strategy at Aon Hewitt, referring to the DOL guidance. “Additionally, this will result in more fiduciary responsibility and oversight.”

The DOL guidance “has added a whole new level of confusion” for participants, said Marina Edwards, a senior consultant in the benefits advisory and compliance group for Towers Watson & Co. in Madison, Wis. “It will confuse people more than it will help them.”

Ms. Edwards has fielded anxious calls from clients. “This is a nightmare,” she said, quoting one unnamed client.

Another client is worried about extra fiduciary responsibilities, Ms. Edwards said. A quick review of this sponsor's self-directed brokerage indicates that enough participants have invested in more than 100 of the funds to trigger the designated investment alternative outlined in the DOL guidance. “They have 15 core funds, and now they'll have exposure to 100 more,” she said.

One client, which had planned to add a brokerage window in the fall, has been told by its ERISA counsel to “seriously reconsider,” she said. Another is pressing ahead to add the option in July.