Industry: New brokerage rules are not needed

Self-directed brokerage accounts are the ERISA version of cicadas for defined contribution regulations — they generate a bit of buzz periodically but then go quiet.

Seven years ago, the DC industry made a lot of noise when the Department of Labor issued a 39-question request for information about whether brokerage accounts merited more federal regulation. The Labor Department didn't act on the RFI, and the issue disappeared from view until late last month, when the ERISA Advisory Council held a hearing in which DC industry members testified that additional regulation isn't necessary and could be expensive and counterproductive.

Another public hearing will be held Aug. 26-27, and the council will hold two public meetings later this year to discuss their findings and recommendations, which it will send to the Employee Benefit Security Administration. The council's membership includes representatives from the public, employers, unions, investment managers and other financial firms.

The council "will study the nature and extent of disclosures that plan participants receive, which plan participants use brokerage windows, and in what manner," says a notice on the council's website. The wants to know "whether guidance would be appropriate and necessary to ensure that plan participants and beneficiaries with access to a brokerage window are adequately informed and protected under ERISA," the website says.

In testimony to the council and in interviews with Pensions & Investments, officials of DC trade groups and record keepers said the brokerage account system isn't broken, so there's no need for more regulation.

"There's no problem that needs to be fixed," Alison Borland, San Francisco-based executive vice president for wealth solutions and strategy at Alight Solutions Inc., said in an interview.

Comments by Ms. Borland and other DC industry representatives sounded the same in 2021 as they did in 2014, when the Labor Department issued its brokerage account RFI. After the RFI, "there was no compelling reason to make changes," Ms. Borland said.

"I was surprised it was on the list" said Kent Mason, a Washington-based partner at Davis & Harman LLP, referring to the ERISA Advisory Council's agenda for this year. "I don't think there's an issue."

Mr. Mason and Ms. Borland were among those testifying at June's virtual ERISA Advisory Council hearing as did representatives of the ERISA Industry Committee, the U.S. Chamber of Commerce and Empower Retirement.

Their unifying theme was that more regulation and more disclosure would create more problems — administrative and legal — for sponsors leading to possible reduction or even cancellation of brokerage accounts.

"We're good; we don't need more disclosure," Chantel Sheaks, vice president for retirement policy for the U.S. Chamber of Commerce, said, adding there is room for more regulatory clarity. "More disclosure isn't better disclosure."

DC industry members "are still a little leery" about the Labor Department and self-directed brokerage accounts due to a guidance document issued — and then swiftly withdrawn — nine years ago, she said.

In May 2012, the Labor Department issued a fee disclosure guidance document, including a passage that said if an investment in brokerage accounts crossed a certain threshold — based on how many participants invested in it — then sponsors would have a fiduciary duty to monitor it. The guidance said such an investment would be considered a designated investment alternative, putting it on a fiduciary par with plan's core lineup.

DC members accused the Labor Department of back-door regulation. They said the guidance document would have forced them to monitor all investments — hundreds or thousands — in the brokerage accounts, defeating the purpose of giving participants extra choices without requiring the fiduciary vetting of the DC plans' core lineups.

An intense industry lobbying effort led to the proposal being withdrawn in July 2012.

In August 2014, the department came back with its RFI about the cost, administration and disclosure policies of the brokerage accounts.

Once again, DC trade groups complained about regulatory overreach and the prospects of more costs and administrative headaches. The agency never acted.

In the RFI, the department expressed concern that sponsors might turn their DC plans into one self-directed brokerage account as a way to avoid or reduce fiduciary responsibilities and fee transparency.

"We never even saw that contemplated" by clients, said Ms. Borland, whose company's record keeping clients are mostly large employers.

At the smaller end of the DC market, "no client has asked us about avoiding fee disclosures," said Kevin Mahoney, the business development officer at FinDec Co., a Stockton, Calif.-based firm which provides third-party administration as well as wealth, insurance and benefits services. His company has about 400 DC plan clients with average assets of $2 million to $3 million and an average of about 50 employees. The firm offers a brokerage account to clients through Charles Schwab & Co.

"In my experience, that fear has never materialized," said Mr. Mason, who works primarily with large plans, large employers and DC trade groups. He suggested that the Obama administration's Labor Department put brokerage accounts on the back burner because the agency "devoted its energy" in 2015 and 2016 to developing the fiduciary rule and a rule on state-run auto-IRA programs.

The Trump administration, he added, "had a different perspective on many issues," so the brokerage accounts never surfaced as a regulatory matter. Now, with the Biden administration, "this was the next opportunity," he said.

Self-directed brokerage accounts already are covered by ERISA rules that provide sufficient information for participants to make informed choices, Aliya Robinson, Washington-based senior vice president for retirement and compensation policy at the ERISA Industry Committee, told the ERISA Advisory Council on June 25. "Under current guidance, plan sponsors must provide participants with sufficient information to understand how the brokerage window works, explain any fees and expenses that may be charged against the participant's account and a statement of the dollar amount of fees charged," she testified.

Ms. Robinson said ERIC and its members feared that additional rules or guidance, such as those proposed in 2012, would lead to "unintended consequences" by creating onerous, expensive administrative requirements.

Faced with such rules, some sponsors could drop the brokerage account. Sponsors may say "Why bother?" she said in an interview. "It's not worth taking on the risk."

Another unintended consequence could be sponsors adding to their core investment lineups at a time when many are trimming their menus for simplicity and using the self-directed brokerage accounts as a way for participants — often the more sophisticated investors — to pursue other investments, she said.

Despite their misgivings about more regulation, DC industry members said there's room for tweaks in ERISA.

Sponsors do a good job of telling participants "that the plan has not screened brokerage window investments," Mr. Mason said. "We're not opposed to strengthening that communication."

Mr. Mahoney of FinDec said he wouldn't mind seeing the Labor Department erect a few "guardrails" for brokerage accounts. The rising role of technology in plan administration and the emergence of new types of investments could require more clarification about what investments are allowed under ERISA, he said.

Another suggestion — he doesn't call it regulation — would be more "clear language" about the responsibilities of sponsors, advisers and service providers.

In her testimony, Ms. Sheaks of the Chamber of Commerce said ERISA should contain language saying the sponsor's duty to monitor covers only the activity of the brokerage account provider and not specific investments in the brokerage account.

Assuming fiduciaries follow all of ERISA's rules, she advocated language that clearly states they shouldn't be liable for a participant losing money in a brokerage account investment.

She also offered some model language that sponsors can provide to participants describing the brokerage account's terms, costs and administration as well as making clear that neither the sponsor nor the account provider is responsible for losses due to participants' investment choices.