By Fred Reish and Bruce Ashton, Partners at Drinker Biddle & Reath, LLP
November 12, 2012
Deciding to offer a brokerage window is a fiduciary decision (absent a plan provision mandating such an option), and there is little guidance on the considerations a fiduciary should use in making the decision. That said, the analysis that a fiduciary would need to undertake is consistent with its general decision-making responsibilities and does not appear to be especially burdensome.
The process for selecting the provider of the window is more clearly defined, and if the fiduciaries follow a straightforward process of assessing the provider’s credentials, qualifications, reasonableness of compensation, and reputation—and pay attention to participant feedback along the way—they should satisfy the prudence requirement. The fiduciaries will generally not be liable for advice given by an RIA to a participant or for investment management by an RIA for investments in a brokerage window; though, if the fiduciaries select the RIA or limit the participant choices, they will have a duty to prudently select and monitor the RIA.
Is Offering a Brokerage Window a Fiduciary Decision?
The first question is whether the decision to offer a brokerage window is a fiduciary one. Unless the plan document mandates that the plan include this option—which, in our experience, very few do—it is a fiduciary decision because the fiduciaries are exercising their discretion concerning how to implement the plan provision giving participants the right to direct their accounts. Beyond that, the considerations for deciding whether to offer a brokerage window have not been specified in the law or by the Department of Labor (DOL). That said, the overarching requirement for any fiduciary decision is that it be made through a prudent process. This requires the fiduciaries to gather the relevant information, assess that information, and then make an informed and reasoned decision. Unfortunately, that leaves open the issue of what information to gather and how to assess it.
…We should point out that the plan sponsor or fiduciaries must make sure that the right to use the brokerage window is made effectively available to all participants in the plan (or at least a nondiscriminatory group of participants). This is not a fiduciary concern but a requirement under the qualified plan rules of the Internal Revenue Code to ensure that the plan does not violate the Code’s non-discrimination rules. For example, it could be considered discriminatory if the minimum account size or a minimum fee for maintaining a brokerage window were set at a level that, realistically, only or predominantly highly compensated employees could utilize. Another threshold consideration is whether there is anything in the plan document that would preclude the offering of a brokerage window. So long as the plan contemplates participant direction of their accounts but does not prohibit brokerage windows, it should be permissible to offer them.
Items for Consideration
Turning to the fiduciary issue, in the absence of any direct authority, we believe that the conservative approach would be for the fiduciaries to consider several items. First, the fiduciaries may consider the investment sophistication of the employee population (that is, are there participants who would benefit from access to a brokerage window) and/or whether any employees desire to work with investment advisors who could assist them in investing through a brokerage window. Also, as a best practice, fiduciaries may want to tell participants that the investments in a brokerage window are not selected and monitored by the fiduciaries and that participants should consider their level of investment knowledge or sophistication and whether they should use an RIA before opting to invest through a brokerage window.
There is no guidance on the fiduciary duty of deciding to offer a brokerage window. That said, the decision is not fundamentally different from other decisions made by fiduciaries in that they must engage in a prudent process and reach an informed and reasoned decision. In this context, fiduciaries may wish to consider the investment sophistication of the workforce and the benefits of the brokerage window to sophisticated participants or to those who work with advisors.
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Reish, C., Ashton, B. (2012, November 12). Fiduciary Considerations in Offering a Brokerage Window. Retrieved from http://www.drinkerbiddle.com/resources?Section=Publications&Year=&Practice=840&Attorney=0&Page=1