Service providers are staring into an abyss of uncertain extra record-keeping duties and unknown additional costs because of recent Labor Department guidance on the use of brokerage windows and self-directed brokerage accounts in defined contribution plans.
“The impact to us will be significant,” said Lynda Abend, managing director of product development for New York Life Retirement Plan Services, Westwood, Mass. “It probably doubles our effort to provide information” to sponsors to comply with new fee-disclosure regulations.
“The vendors aren't in any position to implement this,” said Robyn Credico, senior retirement consultant at Towers Watson & Co. in Arlington, Va., referring to a May 7 Labor Department guidance document for fee-disclosure regulations that take effect Aug. 30. “They are pretty upset.”
Ms. Credico recently polled six major record keepers, who said they won't act until they receive more clarification from the DOL. “They will have to invest a lot to comply,” she said, declining to identify the firms. “It's a fairly large technology endeavor and a big administrative burden.”The object of their ire is a section of the guidance document on designated investment alternatives and self-directed brokerage accounts, brokerage windows and similar plans in which investments are selected by participants outside of those chosen as investment options by plan officials.
Although the regulation and the guidance say a brokerage window per se isn't a designated investment alternative, individual investments in the brokerage window would qualify if selected by enough participants. Once that happens, the investment would merit more monitoring by and fiduciary responsibility of sponsors, the guidance document states.“We're still evaluating (the guidance document), but we would expect compliance costs to be significant,” Linda Wolohan, a spokeswoman for Vanguard Group Inc., Malvern, Pa., wrote in an e-mail.
“As with the case of other providers, system enhancements will be required to scale these reporting efforts to all plan brokerage clients,” she added. “Additionally, if plan sponsors interpret the DOL's guidance to require periodic review of brokerage holdings (such as monthly or quarterly), our reporting capabilities and resources to support those efforts will need to be further enhanced.”
J.P. Morgan Retirement Plan Services, Kansas City, Mo., predicts the brokerage window guidance will create a “significant administrative and operational burden, while not providing the clarity needed to comply with the new rules,” said Robert Holcomb, executive director and head of regulatory and legislative affairs.
Mr. Holcomb said the additional expense and effort doesn't match the potential problems with brokerage windows. “On average, less than 2% of plan participants have investments in brokerage windows and less than 5% of aggregate plan assets are invested via brokerage windows,” he said, referring to plans for which J.P. Morgan is record keeper.