The Labor Department is poised to take a closer look at whether investors are protected in defined contribution plans that enable employees to go beyond the plan's menu to choose investments.
The department is scheduled to release a request for comment in April on so-called brokerage windows in 401(k) plans. The mechanisms provide a way for workers to select investment vehicles that are not offered in the plan.
In 2012, the DOL addressed concerns about brokerage windows in two Field Assistance Bulletins. But the answers to the frequently-asked-questions posed in the documents generated more questions.
The comment solicitation is the first stage in a “rule-making project” that will focus on the “fiduciary obligations and regulatory safeguards” surrounding brokerage windows, according to the DOL, which put the topic on its regulatory agenda for the first time.
“This is potentially the beginning of a regulatory effort on brokerage windows that could be very broad and significant,” said Bradford Campbell, counsel at Drinker Biddle & Reath LLP in Washington and a former DOL assistant secretary for the Employee Benefits Security Administration. “It is one of the surprises on the regulatory agenda. They're sticking their toe in the water.”
Plan sponsors are looking for more guidance on the use of brokerage windows, according to Timothy Kennedy, a partner at law firm Montgomery McCracken Walker & Rhoads LLP in Philadelphia. There are questions about disclosures as well as whether a registered investment adviser has to be hired to help participants.
“It's a little unclear out there, the fiduciary framework for brokerage windows,” Mr. Kennedy said. “Right now, people are doing their best. A more clear process would help plans.”
Brokerage windows are not widespread. In 2012, they were offered in 17.1% of 686 401(k) plans surveyed by the Plan Sponsor Council of America.
“It's more of a niche in the industry,” said Robert Kaplan, national retirement consultant at ING U.S.
The focus on brokerage windows reflects the DOL's concern that plan participants are on their own if they opt to use the mechanism.
“They may make their decisions on emotion rather than investment savvy; that's the Department of Labor's worry,” Mr. Kaplan said.
Even when a brokerage window is included in a retirement plan, its use may be limited. The Employee Benefit Research Institute has included the mechanism in its plan for more than a decade.
“Over all these years, I'm the only one who's used it,” EBRI Chief Executive Dallas Salisbury said.
But he said it is an important part of EBRI's retirement program for its employees.
“In a self-directed plan, you should allow individuals to pursue whatever (investment) fits their risk tolerance,” Mr. Salisbury said.