DC industry frets over brokerage issue, claims it's a rule in disguise

Defined contribution industry leaders are worried about greater risks of participant lawsuits and Labor Department enforcement now that the DOL has released guidance on plan sponsors' responsibilities for self-directed brokerage accounts.

Meanwhile, industry trade group officials claim that what the department calls guidance is a new regulation in disguise. Plus, they aren't satisfied with the promise from Labor Department officials to give them “transition relief” by temporarily forgoing enforcement if good faith efforts to comply are made.

The DOL's comments about self-directed brokerage accounts, brokerage windows and similar options were included in the Labor Department's May 7 guidance document on participant fee disclosure regulations, which take effect Aug. 30.

Trade group representatives say the DOL action — unless withdrawn or modified — will increase fee disclosure compliance costs, fiduciary responsibilities and monitoring of brokerage accounts.

“Plan sponsors never thought they had an obligation to monitor funds in a brokerage account,” said Larry Goldbrum, general counsel of the SPARK Institute, Simsbury, Conn., which represents record-keeping, benefits consulting, third-party administration and other retirement industry firms.

“Our concern is that this regulatory process has been going on for years,” said Craig Hoffmann, general counsel for the American Society of Pension Professionals and Actuaries, Arlington, Va. “Our record-keeping members thought they were done. There needs to be some balance between clarification and new obligations that were a surprise to many of us.”

Messrs. Goldbrum and Hoffmann are among those saying Labor Department officials should have formally proposed a new rule, asking for public comment and then issuing a final regulation.

Otherwise, industry members say, the uncertainty and complexity of the guidance will make sponsors and providers more vulnerable to fiduciary duty lawsuits by participants and beneficiaries.

DOL officials say no new regulation is needed because the guidance is simply a clarification of existing regulations, according to industry representatives who met May 31 with Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration, and other Labor Department officials.

“We're happy to comply (with fee disclosure regulations), but this goes beyond the regulations,” said Kent Mason, a partner with law firm Davis & Harman LLP, Washington. The DOL's guidance “should not have the force of law.”

According to the DOL guidance document, if the number of plan participants choosing specific investments in a self-directed brokerage account crosses certain threshholds, these investments will be considered designated investment alternatives and subject to greater fiduciary responsibilities under the Employee Retirement Income Security Act.

Industry leaders complain this interpretation turns the concept of designated investment alternatives upside down: Instead of sponsors conducting due diligence research to choose designated investment alternatives, such as core funds or target-date funds, their fiduciary responsibilities can increase if enough participants choose a brokerage-account investment.

“Designating specific investment alternatives ... enables participants and beneficiaries, who often lack sufficient resources to screen investment alternatives, to compare the cost and return information for the designated investment alternatives when they are selecting and evaluating alternatives for their accounts,” Jason Surbey, a DOL spokesman, said in an e-mail. “Evaluating the role of brokerage windows in these plans is also critical.”

The brokerage-windows dispute is compounded by the fact the DOL hasn't issued guidance for other fee-disclosure rules — covering providers and sponsors — that take effect July 1.

Needless to say, DC industry members are apprehensive about the approaching deadlines and what they say is the lack of clear guidance.

In late April, the ASPPA and two affiliate organizations wrote DOL officials, asking for transition relief for certain portions of the provider-sponsor rules.

In late May, the SPARK Institute requested transition relief for the provider-sponsor rules as well as for the DOL guidance on brokerage accounts. The SPARK Institute wants to be sure providers acting in good faith “will not be subject to increased risk of private party litigation and claims” as well as DOL enforcement, the organization's letter said.

“There is nothing that the DOL can do to Bubble Wrap a sponsor from a lawsuit,” said a top executive of a retirement industry trade group, who attended the May 31 meeting with DOL officials. “The DOL could have put more (legal defense) language in there, but they didn't.”

The Labor Department only offered “transition relief” of DOL enforcement for good-faith efforts, but it could have added that good-faith actions would mean “no cause of action” against sponsors, said Marcia Wagner, managing director of the Wagner Law Group, Boston.

The extra wording would have been a better signal of the DOL's intent and made life easier for the industry, “but they didn't go there,” she said.

A May 15 letter to members of the American Benefits Council, Washington, which Pensions & Investments obtained, warned the Labor Department's proposed transition relief could be “subjecting plan fiduciaries to the risk of participant lawsuits.”

A May 25 letter from the Plan Sponsor Council of America, Chicago, to its members characterized the transition relief as a policy that “will not preclude legal challenges from participants and beneficiaries.”

The DOL's transition-relief guidance not only fails to guard against participants' lawsuits but also contains unclear wording about DOL enforcement, said Mr. Mason, of Davis & Harman. “Even if I do things perfectly, there are enormous questions if I qualify for transition relief,” he said.

To be eligible, he said, sponsors must act in good faith, based on a reasonable interpretation of the rules, and have a plan to comply with the DOL's requirements for brokerage accounts.

“This has been such a shock” to the industry, he said. “There are very, very few systems in place to comply” with this guidance, which requires sponsors to monitor participants' investments in brokerage accounts.

One example where the guidance document is unclear, he said, is a passage that says DOL enforcement “generally would be unnecessary” if providers or sponsors met all of the guidance document's good-faith and plan-compliance requirements.

Industry insiders believe the Labor Department's guidance stems from discomfort with brokerage accounts.

“The DOL is not pleased with brokerage windows and brokerage platforms being used by plan fiduciaries to mitigate or reduce their fiduciary responsibilities,” said Mr. Goldbrum of the SPARK Institute.

Because the DOL encourages sponsors to provide a manageable number of number of investment options, it is “concerned about giving people too much leeway due to past abuses,” Ms. Wagner said. “It doesn't want to create a lot of "outs' or "wiggle room' for plan sponsors or the vendor community.”

Several industry officials said they'd understand the DOL's approach if the guidance were applied to plans for which a brokerage account was the only investment option. They said they could understand the Labor Department's concern about providers peddling brokerage accounts to sponsors as a way of reducing fee-disclosure duties.

However, Labor Department officials told industry executives at the May 31 meeting that the guidance applies to all plans.

“They look at brokerage windows as being outside the typical "safe' investment options for retirement plans,” said the unnamed trade association executive who attended the May 31 meeting with DOL officials. “Their view of brokerage windows is that things can go completely haywire and that there is nothing to stand between participants and the wild west of investments.”

Industry members said they don't have a specific game plan for their next step, noting an appeal to the Office of Management and Budget or to Congress is possible, as are continuing talks with the DOL.

“The (Labor) Department has been and will continue to be open to input,” Mr. Surbey, the Labor Department spokesman, wrote.