Department of Labor Guidelines Can Put Crimp in a 401(k) Windows for Brokerage

Guidance from the US Department of Labor (DOL) in March 401(k) warned plan insureds to “exercise extreme caution” before adding crypto options to planning investment lists. But the directive, Compliance Assistance Issue 2022-01, extended its warning not only to plans that offer crypto as a specific investment, but also to plans that allow participants to invest in stocks, bonds, and other securities through an open platform known as a brokerage window, also referred to as an account Self-directed mediation (SDBA).

Mediation Monitoring Windows

“Plan agents responsible for supervision [cryptocurrency] And choices to invest or allow such investments through brokerage windows should expect to be questioned about how they align their actions with their duties of prudence and loyalty.”

For attorneys who specialize in helping retirement plan trustees comply with the Employee Retirement Income Security Act (ERISA), the Department of Labor appeared to caution that, in contrast to its longstanding position, plan agents should not only select a brokerage window provider but also monitor investments available from during the mediation window.

“This new investigative effort may raise a problem in the area of ​​plan investments about which most plan sponsors have not worried as much. This is the question of brokerage windows, which have previously not been subject to much scrutiny, if any, by the DOL,” on John Kirk’s blog, Attorney at Graydon Law Firm in Cincinnati. “The prevailing thought was that creating a self-directed brokerage opportunity was a fiduciary duty, but once established, the investments were the sole responsibility of the participants.”

He advised, “With this new guidance, plan sponsors may need to reconsider their approach. At a minimum, plan sponsors should determine whether participants have invested in cryptocurrency.”

Chicago-based Mike Barry, a senior advisor at retirement plan advisory firm October 3, writes that because brokerage windows may include publicly traded stocks and thousands of mutual funds, it’s “virtually impossible to assess the wisdom of all these investments. However, [the guidance] He suggests that the offer of cryptocurrency in the brokerage window is “subject to the duties of prudence and loyalty.” “

Barry also questioned what he called “in effect, regulation through a press release, without the opportunity for comment and stakeholder feedback that the formal regulatory process provides.”

Brenda Berg, a partner at Holland & Hart in Denver, advised that “the recent comments by the Department of Labor regarding cryptocurrency in the brokerage window may indicate that trustees also have duties in terms of window design and restrictions on available investments.

It recommends that trustees, when structuring the mediation window, may wish to consider issues such as:


  • should


    Investmentsat Mediation winsDow be limitedDr In any way? Restrictions may include the type of investments (such as cryptocurrency or other high-risk investments, employer stock, investments otherwise available under the plan) or a percentage limit.

  • They are the participants educated enough Regarding the mediation window?

  • IS WINDO BROKERAGETh available For a non-discriminatory group of participants?

  • What is the record keeping plan fee fair allocation Across assets/participant accounts investing through brokerage window in addition to other options?

  • How are the trustees? Observe and handle properly Any prohibited transactions or non-taxable business income?

Berg advised that “plans displaying mediation windows should remain on the alert.”

Business critical groups to move

The U.S. Chamber of Commerce, in an April 13 letter to Ali Khawar, the acting assistant secretary for the Department of Labor’s Employee Benefits Security Administration, took the position that “there is nothing in ERISA or regulations that requires ERISA agents to directly monitor every primary investment option in a brokerage.” window, and that “it would be impossible for a credit plan to monitor and demand every investment option in the window, that would effectively prevent a brokerage window from being displayed.”

Similarly, an April 12 letter to the bellow signed jointly with the American Benefits Board and 10 other employer and industry associations said that adjusting regulations “would be time-consuming and expensive to be able to track direct cryptocurrency investments in brokerage windows — and very difficult to track” products with relevance.” … The instructions issued thus not only conflict with existing law and practices currently in place, but also retroactively modify the law, so that the previous failure to monitor brokerage window investments is investigated in a specific manner recently announced as a possible violation of ERISA.”

However, some have raised concerns about the use of brokerage windows. Last December, for example, market intelligence firm Cerulli Associates reported that while SDBAs provide retirement plan participants with access to many investment options, the resulting investments can also create potential risks for plan participants and sponsors.

“It would be easy and unsurprising for plan participants to overestimate their investment knowledge,” said Sean O’Brien, chief analyst at Cerulli. “With the freedom to choose from a wide range of investments and execute trades as they see fit, these individuals may end up overtrading or risking more or less than is wise given their age and circumstances.”

Mediation windows are more popular

While only a minority of 401(k) and similar plans provide brokerage windows, these numbers are rising.

Vanguards investment company
How to save America 2021 The report revealed that of the 1,700 employer-sponsored plans for which it provided record-keeping services, 20% offered a self-directed mediation window, rising to 38% among plans with at least 5,000 participants.

Of the large plans with more than 50,000 participants operated by Fidelity, “nearly 58 percent offer self-directed brokerage, while 35 percent did so 10 years ago,” said Chris Herman, chief investment strategist for workplace investment. In Fidelity Investments.

He noted that smaller plans are unlikely to offer a mediation option.


Related SHRM article:

Fidelity to allow Bitcoin investments in 401(k) accounts,
SHRM OnlineApril 2022

DOL warns of 401(k) plans against allowing crypto investments,
SHRM OnlineMarch 2022

401(k) “Windows” re-considered as gateways to ESG investments,
SHRM OnlineJuly 2021

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