DC providers fear additional costs, duties from brokerage guidance

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.

(A recent survey by Aon HewiHewitt Associates, Lincolnshire, Ill., found that brokerage windows accounted for 6% of assets in plans that offered this option in 2011.)

Phyllis Borzi, the Labor Department's assistant secretary for the Employee Benefits Security Administration, has emphatically maintained the guidance document relates to existing law, and brokerage accounts don't absolve sponsors from their fiduciary duties.

“It is hard for me to imagine that people could say with a straight face, "This is new, we never knew,'” Ms. Borzi said in a June 18 speech to members of the SPARK Institute in Washington. “We've seen a disturbing trend, where lawyers advise their plan sponsor clients that they can avoid ERISA responsibility by just giving choices.”

A plan fiduciary's duty includes selecting a brokerage window, Ms. Borzi added, “and you have a duty to monitor that.”

The industry members' unhappiness is exacerbated by what they say is the DOL's lack of clarity in a document designed to clarify fee-disclosure rules.

For example, they say they don't understand the meaning of the word “significant” when the guidance document refers to the number of people choosing a brokerage window investment that could elevate this investment to a designated investment alternative.

Providers also aren't sure if the brokerage account guidance affects mutual funds, exchange-traded funds and individual stocks. Some industry representatives say they believe only mutual funds are covered, but others believe the scope is wider.

Ms. Abend, of New York Life, said she believes individual stocks, ETFs and mutual funds will be affected.

Fidelity Investments, Boston, is proceeding as if many investments will be covered. “Absent further clarification from the DOL, it appears that investments available for selection and that have been "selected by significant numbers of participants' would be subject to review and potentially need to be treated as designated investment alternatives,” said a Fidelity client memo obtained by Pensions & Investments. ”This includes individual securities, mutual funds and ETFs as well as CDs.”

Another concern, according to the Fidelity memo, is how to treat brokerage account investments in preparing the DOL-required comparative chart for plan participants about designated investment alternatives. This chart includes performance data, benchmarks and expense-ratio information of a plan's investment options.

In fact, neither Fidelity nor Vanguard is able so far to provide such information for the chart, according to the Fidelity memo and Vanguard's Ms. Wolohan.

Joan McDonagh, senior director for national regulatory policy for Great-West Retirement Services, Greenwood Village, Colo., said the document created “many, many questions,” and that the DOL should have conducted a formal rule-making process so all of these questions “could be researched and vetted.”

Industry representatives said they should have some breathing room because the guidance document allows for “transition relief,” a statement by the DOL that it will temporarily withhold enforcement if sponsors and providers make good faith efforts to comply with the guidance. Some industry members say the transition relief could last for 12 months, but others point out such relief isn't automatic.

Given the uproar over the guidance document and DOL officials' comments that more guidance is coming soon, industry players are doing nothing right now.

And that's just fine with Lori Lucas, executive vice president and defined contribution practice leader, at Callan Associates Inc., San Francisco. “This is still being digested by the industry,” she said. “No one is taking action. No one wants to overreact.”

Reporter Hazel Bradford contributed to this article.