Defined contribution industry representatives are resuming efforts to convince Labor Department officials that more extensive regulation of self-directed brokerage accounts is unnecessary and burdensome.
Officials from organizations representing large plans, record keepers and other providers said in interviews and in comments filed with the DOL that existing rules already protect participants and enable fiduciaries to follow the requirements of prudence of the Employee Retirement Income Security Act of 1974.
They warn that more rules — similar to ideas floated and then quickly withdrawn by the DOL in 2012 — would raise costs, increase fiduciary risk, discourage plans from offering brokerage accounts and encourage plans with such options to drop them.
Industry participants were reacting to the Labor Department's request for information in August, asking 39 questions about the costs, administration and disclosure policies of self-directed brokerage options.
The Labor Department issued the RFI to “determine whether, and to what extent, regulatory standards or other guidance concerning the use of brokerage windows may be necessary to adequately protect participants' savings,” Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration, said when the RFI was issued.
The RFI noted the department's concern that some DC plan executivesmight offer brokerage-account-only investment menus to dodge some fiduciary duties. This was based on the Labor Department's “observation that brokerage-window features were being marketed by some (providers) to plan fiduciaries as a device to avoid making participant investment disclosure” required by DOL rules, the request for information said.
Among those interviewed for this story, Lynn Dudley, senior vice president of global retirement and compensation policy for the American Benefits Council, Washington, said, “Don't do very much — or don't do anything at all.”
Current regulations governing the use and administration of brokerage windows among larger plans — the ones that offer brokerage accounts as a supplement to core menus — are “working well,” said Ms. Dudley, whose organization's members are primarily large companies.
“Increased reporting and disclosure requirements would likely have a negative effect on our ability to offer a self-directed brokerage window to our participants,” wrote an official of a company in comments filed anonymously. The corporate official said 6.3% of the $5 billion plan is in brokerage accounts.
Survey results released this month by the Plan Sponsor Council of America, Chicago, show brokerage accounts represented an average 2.3% of total assets last year among 613 plans with combined $832 billionin assets.
For a “typical” DC plan offering a self-directed brokerage account, 1% to 2% of participants invest in the option, representing 3% to 5% of total plan assets, Edmund Murphy III, the Denver-based president of retirement services for Empower Retirement, said in a comment letter.
Two years ago, DOL officials issued a field assistance bulletin — a formal guidance document — on fee-disclosure rules that also outlined DOL's views on how plans should monitor and administer brokerage-account windows. It said if the number of participants choosing a specific investment in a brokerage-account exceeded a certain threshold, that investment could be subject to the same fiduciary standards as investments in a plan's core menu.
The industry erupted in protest, saying the document was an attempt at back-door regulation. They said it would create an enormous expense and said record keepers lacked the technology to enable such monitoring.
Ms. Borzi withdrew the passage that angered the industry, reaffirming brokerage accounts are not considered “designated investment alternatives.”
Now, industry participants want to make sure the RFI doesn't lead to a replay of 2012.
“If you see a problem in some places, you can tailor a solution to that problem,” said Kathryn Ricard, senior vice president for retirement policy at the ERISA Industry Committee, Washington. “Don't blow up the whole thing. Fix the problem,”
Ms. Borzi believes plan sponsors should “take a measured approach to managing brokerage windows,” Robert Benish, executive director of the PSCA, said in an interview. “In this case, it's basically going after a squirrel with an elephant gun.”
Mr. Benish said if enhanced monitoring of brokerage accounts is enacted, plan sponsors might drop the option for fear of taking on additional fiduciary risk, cost and administrative responsibilities. The liquidation process could create its own set of fiduciary risks and uncertainty, he said.
Some DC industry participants said Labor Department officials should distinguish between plans that offer brokerage accounts as a supplement to their investment lineups and plans for which the brokerage account is the sole investment option.
Charles Schwab & Co. officials want the DOL to look at self-directed brokerage accounts in a “bifurcated manner,” making a distinction between plans for which brokerage accounts are supplemental options and those for which brokerage accounts are the sole option, Lawrence Bohrer, the Denver-based vice president of corporate brokerage retirement services, said in an interview. n