Friday, October 17, 2014

What are EBSA’s Plans for Brokerage Windows?

The Department of Labor’s Employee Benefits Security Administration (EBSA) has had brokerage windows on its radar since the agency issued final regulations on investment and fee disclosure for participant-directed retirement plans in October of 2010.  The latest evidence is EBSA’s request-for-information (RFI) in August of this year asking for public comment on these investing arrangements in individual account-type plans, such as 401(k)s.  EBSA is asking the public and those in the industry a series of “39” questions, the stated purpose being to determine “… whether, and to what extent, regulatory standards or other guidance concerning the use of brokerage windows…are necessary to protect participants’ retirement savings.” 
For the unfamiliar, a brokerage window in a retirement plan is a portal through which a participant can select from a virtually limitless array of investment choices; much broader than a typical selection of investments available to retirement plan participants.  It is an option we most often see used by experienced investors who are motivated to research and inform themselves on both conventional and unconventional investments, and do not want to be restricted to a preselected menu of mutual funds, annuity products, or other traditional investments. 

A year and a half after issuing its 2010 investment and fee disclosure regulations, in May of 2012, EBSA issued field assistance bulletin (FAB) 2012-02 to add clarity to these regulations.  FAB 2012-02 contained more than three dozen items in question-and-answer format.  Based on EBSA’s approach in FAB 2012-02, many felt the agency viewed brokerage windows as a “bogey” on their radar, something to aim for with their regulatory armament.

Under EBSA’s regulations and FAB 2012-02, employers are required to identify specific designated investment alternatives – DIAs—and provide for each of these such details as investment performance history, expense ratios, risk-and-return characteristics, and fees.  But EBSA went beyond the reach of its regulations in FAB 2012-02.  The agency attempted to adapt the legitimate DIA disclosure requirements in the regulations – which are suited to specific individual investments – to the brokerage window option, which can offer almost limitless choices.  FAB 2012-02 proposed rules for brokerage windows that would have required a level of participant investment monitoring virtually impossible under current platforms. 
FAB 2012-02 set arbitrary thresholds for participant choices of investments that might be made through a plan’s brokerage window.  If enough participants chose a particular investment through that brokerage window, that investment would become a de facto DIA, with all of the information gathering and investment disclosure requirements that entails.  Why?  EBSA has repeatedly expressed a suspicion that plans may identify few – or no – DIAs, and establish only a brokerage window, in an effort to circumvent the disclosure requirements for DIAs.   

I see two problems with this vein of thought.  First, brokerage windows investments are typically reported to retirement plan recordkeepers and administrators in aggregate amounts, not in discrete “by-the-investor” totals with transaction activity.  Those providing recordkeeping services simply do not have the ability to link to all the possible brokerage options a plan participant may choose from. In other words, FAB 2012-02 was asking for information that was essentially beyond the ability of the industry to obtain, and plan administrators could scarcely comply.  This is information, by the way, which the individual participant does get from the self-directed brokerage provider.  This led to a major backlash of industry opposition.  As a result of the reaction, EBSA at least temporarily changed course, issuing FAB 2012-02R in July of that year to give brokerage windows an exemption from being treated as a DIA. 
Second, I haven’t seen evidence of any trend toward plan sponsors offering a brokerage window to the exclusion of DIAs.  Ascensus provides recordkeeping services to some 40,000 retirement plans, and a query of these plans’ features left us hard-pressed to find any plans, other than owner only plans, that offered only a brokerage window for plan investing.  As we’ve said before, this heightened level of EBSA concern can be characterized as a solution in search of a problem – a perceived problem that from my perspective appears not to exist.

Despite backing down in FAB 2012-02R, EBSA left the door ajar for possible future action.  The close of FAB 2012-02R stated that “The Department intends to engage in discussions with interested parties to help determine how best to assure compliance with these [fiduciary] duties in a practical and cost effective manner, including, if appropriate, through amendments of relevant regulatory provisions.” 
The DOL’s Semiannual Regulatory Agenda released in May of this year listed “Standards for Brokerage Windows – PreRule” as a priority. This agenda item was fulfilled with EBSA’s August RFI.  A reading of the 39 questions and their subparts does not give comfort to those who fear that EBSA is committed to restricting the use of brokerage windows, one way or another.  Let’s just hope that the agency was sincere when it used the term “practical” in the sign-off to its FAB.