[Federal Register Volume 79, Number 162 (Thursday, August 21, 2014)]
[Proposed Rules]
[Pages 49469-49473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-19832]



Employee Benefits Security Administration

29 CFR Parts 2520 and 2550

RIN 1210-AB59

Request for Information Regarding Standards for Brokerage Windows 
in Participant-Directed Individual Account Plans

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Request for information.


SUMMARY: The Employee Benefits Security Administration of the U.S. 
Department of Labor (the Department) is publishing this Notice as part 
of its review of the use of brokerage windows (including self-directed 
brokerage accounts or similar arrangements) in participant-directed 
individual account retirement plans covered by the Employee Retirement 
Income Security Act of 1974 (ERISA). Some plans offer participants 
access to brokerage windows in addition to, or in place of, specific 
investment options selected by the plans' fiduciaries. Through these 
arrangements, plan participants may be able to choose among the full 
range of investment options available in the investment marketplace. 
The Request for Information contained in this Notice will assist the 
Department in determining whether, and to what extent, regulatory 
standards or other guidance concerning the use of brokerage windows by 
plans are necessary to protect participants' retirement savings. It 
also will assist the Department in preparing any analyses that it may 
need to perform pursuant to Executive Order 12866, the Paperwork 
Reduction Act, and the Regulatory Flexibility Act.

DATES: Comments must be submitted on or before November 19, 2014.

ADDRESSES: You may submit written comments to any of the addresses 
specified below.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include RIN 1210-AB59 (Brokerage 
Windows RFI) in the subject line of the message.
     Mail: Office of Regulations and Interpretations, Employee 
Benefits Security Administration, Room N-5655, U.S. Department of 
Labor, 200 Constitution Avenue NW., Washington, DC 20210, Attention: 
``Brokerage Windows RFI.''
    All submissions received must include the agency name and 
Regulation Identifier Number (RIN) for this rulemaking. Comments 
received will be posted without change to http://www.regulations.gov 
and http://www.dol.gov/ebsa, and made available for public inspection 
at the Public Disclosure Room, N-1513, Employee Benefits Security 
Administration, 200 Constitution Avenue NW., Washington, DC 20210, 
including any personal information provided. Do not include any 
personally identifiable information (such as name, address, or other 
contact information) or confidential business information that you do 
not want publicly disclosed. Comments posted on the Internet can be 
retrieved by most Internet search engines. Comments may be submitted 
anonymously. Persons submitting comments electronically are encouraged 
not to submit paper copies. All comments will be made available to the 

FOR FURTHER INFORMATION CONTACT: Kristen Zarenko, Office of Regulations 
and Interpretations, Employee Benefits Security Administration, (202) 
693-8500. This is not a toll-free number.


[[Page 49470]]

A. Background

    Retirement plans that allow participants to choose investments for 
their individual accounts typically offer a limited set of specific 
investment options, which are selected and monitored by a plan 
fiduciary. Some plans also offer brokerage windows, which enable 
participants to select investment options beyond those specifically 
designated by the plan fiduciary. In some cases, the brokerage window 
may be offered in place of any designated investment options. The use 
of brokerage windows and similar arrangements by participant-directed 
individual account retirement plans (such as 401(k) plans) raises 
important issues concerning ERISA's reporting and disclosure 
requirements, as well as ERISA's fiduciary standards.
    The Department addressed disclosure requirements for brokerage 
windows in a regulation requiring plan administrators to disclose 
certain plan and investment-related information to participants and 
beneficiaries in participant-directed individual account plans (the 
``participant-level disclosure regulation'').\1\ This regulation was 
intended to ensure that all participants and beneficiaries in such 
plans have the information they need to make informed decisions about 
the management of their individual accounts and the investment of their 
retirement savings. To that end, the regulation requires that, at least 
annually, participants and beneficiaries are furnished a comparative 
chart (or similar format) that contains information about the plan's 
``designated investment alternatives.'' Plan administrators must, for 
example, furnish fee, historical performance, and comparative benchmark 
information for each designated investment alternative.

    \1\ 75 FR 64910 (Oct. 20, 2010), codified at 29 CFR 2550.404a-5, 
and including conforming changes to the Department's ``404(c) 
regulation'' relating to plans that allow participants to direct the 
investment of their individual accounts, at 29 CFR 2550.404c-1.

    The regulation expressly provides that brokerage windows are not 
``designated investment alternatives.'' \2\ As a result, plan 
administrators are not required to disclose the detailed performance, 
fee, and other investment-related information required with respect to 
``designated investment alternatives.'' Instead, plan administrators 
must provide ``a description of any `brokerage windows,' `self-directed 
brokerage accounts,' or similar plan arrangements that enable 
participants and beneficiaries to select investments beyond those 
designated by the plan.'' \3\ In addition, the plan administrator must 
provide an explanation of any fees and expenses that may be charged 
against an individual account, on an individual, rather than on a plan-
wide, basis, in connection with the arrangement. Finally, participants 
must be furnished a statement of the dollar amount of the fees and 
expenses charged to their accounts in connection with the arrangement 
during the previous quarter.\4\

    \2\ The regulation defines a ``designated investment 
alternative'' to mean: ``[A]ny investment alternative designated by 
the plan into which participants and beneficiaries may direct the 
investment of assets held in, or contributed to, their individual 
accounts. The term ``designated investment alternative'' shall not 
include `brokerage windows,' `self-directed brokerage accounts,' or 
similar plan arrangements that enable participants and beneficiaries 
to select investments beyond those designated by the plan.'' 29 CFR 
2550.404a-5(h)(4) (emphasis added).
    \3\ 29 CFR 2550.404a-5(c)(1)(i)(F).
    \4\ 29 CFR 2550.404a-5(c)(3)(ii)(A).

    Following publication of the participant-level disclosure 
regulation, plan sponsors and administrators raised a number of 
questions about the regulation, including how it applied to brokerage 
windows. These questions concerned both the required disclosures for 
brokerage windows as well as other fiduciary obligations that may arise 
when a plan offers a brokerage window. In response, the Department 
provided a series of ``frequently asked questions'' about the 
participant-level disclosure regulation. These questions and answers 
were published in Field Assistance Bulletin 2012-02R (FAB).\5\ FAB 
Question 13 describes the information about brokerage windows that must 
be furnished to participants and beneficiaries in order to satisfy 
section (c)(1)(i)(F) of the regulation, which requires a 
``description'' of the brokerage window. The FAB lists specific 
information requirements, including instructions for participants on 
how to use the plan's brokerage window, any restrictions on trading 
within the brokerage window, and fees and expenses that may be charged 
in connection with using the brokerage window (e.g., annual fees for 
using the brokerage window feature, brokerage or other commissions for 
trades within the brokerage window).

    \5\ http://www.dol.gov/ebsa/regs/fab2012-2R.html.

    FAB Question 39 \6\ clarifies that a brokerage window is not itself 
a ``designated investment alternative'' under a plan. The Department 
also explains in Question 39 that a plan fiduciary's failure to 
designate investment alternatives, for example, by offering no menu of 
core investment options other than a brokerage window to avoid the 
regulation's investment-related disclosure requirements, may raise 
questions under ERISA's section 404 general statutory duties of 
prudence and loyalty. The Department issued this cautionary statement 
based, in part, on its observation that brokerage window features were 
being marketed by some to plan fiduciaries as a device to avoid making 
participant investment disclosures required under the regulation.

    \6\ The original version of the FAB, which was rescinded and 
replaced by FAB 2012-02R, included Question 30, which some viewed as 
raising the possibility that plan fiduciaries could be responsible 
under ERISA for the underlying investments into which participants 
invest through a brokerage window. Further, some plan sponsors and 
service providers stated that the Department should not have issued 
Question 30 without prior notice and opportunity for public comment. 
Although the Department disagreed, it withdrew the original FAB. The 
revised FAB replaced Question 30 with Question 39, which is 
described in this Notice.

    The Department is aware that plan fiduciaries and service providers 
continue to have questions about their duties under ERISA's general 
fiduciary standards apart from the specific requirements of the 
participant-level disclosure regulation. The Department is committed to 
engage in discussions with interested parties to help determine how 
best to assure compliance with these duties in a practical and cost-
effective manner. This includes considering whether amendment of 
relevant regulatory provisions or interpretive guidance may be 
appropriate and necessary to ensure that participants and beneficiaries 
with access to brokerage windows are adequately protected.
    Since issuance of the FAB, the Department has reviewed literature, 
articles and other commentary available on the use of brokerage windows 
in 401(k) plans. The Request for Information contained in this Notice 
(the RFI) is the Department's next step in increasing its understanding 
of this topic.
    Some articles make the case that brokerage windows can be highly 
attractive and suitable plan features for sophisticated investors. 
These individuals assert that participants with a more advanced 
understanding of the investment marketplace, including the various 
costs and risks associated with investing in different types and 
classes of securities, may benefit from brokerage windows and the 
ability to create a better customized, more diverse portfolio. 
Brokerage windows may, for example, provide access to a specialized 
asset class or classes not available through the plan's core designated 
investment alternatives. Sophisticated investors may be less likely to 

[[Page 49471]]

overwhelmed by a large number of investment options and may benefit 
from the flexibility that brokerage windows offer.
    Some articles make the case that brokerage windows actually benefit 
rank-and-file participants by indirectly limiting the field. These 
individuals assert that many plans over time have increased the number 
of designated investment alternatives they offer in response to demands 
from company owner-employees, senior executives, and other potentially 
sophisticated employee-investors for access to more diverse investment 
opportunities. This results in some plans having a very large number of 
designated investment alternatives, which may confuse less 
knowledgeable participants. Making a brokerage window available to the 
more demanding employees enables plans to offer a more manageable 
number of designated investment alternatives to rank and file employees 
who, according to those proponents of brokerage windows, have little or 
no interest in investment opportunities beyond a basic set of 
diversified options.
    Other articles, however, counter that brokerage windows may present 
undue risks for many retirement plan participants, because plan 
fiduciaries do not engage in a deliberative process to affirmatively 
review and select each of the investment options available through 
brokerage windows. Thus, they say in the absence of a deliberative 
review and selection process by an ERISA fiduciary, participants may 
not have adequate or any protections against potentially costly or 
unsuitable investments made through the brokerage window. Opponents 
maintain, for example, that the same or similar investments often cost 
more when selected through a brokerage window as opposed to when they 
are designated by the plan. Brokerage window opponents maintain that 
plans have no bona fide method to restrict brokerage window access only 
to sophisticated participants, and that the use of dollar thresholds or 
gateways, for example, may discriminate in favor of highly compensated 
employees. Opponents further maintain that although it is permissible 
to do so, brokerage window operators rarely limit the investments they 
make available. Opponents also allege that in-plan investments often 
subsidize the administrative costs of participants who opt to use the 
brokerage window.

B. Request for Information

    The purpose of this RFI generally is to increase the Department's 
understanding of the prevalence and role of brokerage windows in 
participant-directed individual account plans covered by ERISA. In 
particular, the RFI will focus on why, under what circumstances, and 
how often these brokerage windows are offered and used in ERISA plans, 
and the legal and policy issues that relate to such usage. The 
Department wants to make sure that participants are not exposed to 
undue risks from brokerage windows and that plan fiduciaries properly 
understand the scope of their ongoing responsibilities with respect to 
brokerage windows. The information received in response to this RFI 
will assist the Department in determining whether, and to what extent, 
regulatory standards or safeguards, or other guidance, are necessary to 
protect participants' retirement savings. The RFI contains a number of 
questions. Respondents need not answer every question, but should 
identify, by its number, each question addressed. Interested persons 
also are encouraged to address any other matters they believe to be 
germane to the general topic of this RFI.
    Defining ``Brokerage Windows''--Scope. The Department understands 
that a variety of different plan and investment arrangements may be 
encompassed by the terms ``brokerage window,'' ``self-directed 
brokerage account,'' and similar arrangements. For example, open mutual 
fund windows may permit participants to invest in hundreds or thousands 
of mutual funds. More limited mutual fund windows or ``supermarkets'' 
may permit participants to invest in any mutual fund on one or more of 
a particular vendor's platforms, but not necessarily every mutual fund 
on the market. Other brokerage accounts also offer participants access 
to a virtually unlimited number of individual stocks, exchange-traded 
funds, and other securities.
    1. What are the various brokerage window, self-directed brokerage 
account, and similar arrangements that are made available in 401(k) 
plans, and which one (or more) is the most common? What are the 
benefits and drawbacks of these various arrangements?
    2. If a more specific definition of a ``brokerage window'' is 
provided, as a regulatory or interpretive matter, how should it be 
    3. Should the fiduciary, disclosure, or other standards that apply 
to brokerage windows (and which are raised in more detail below) vary 
depending on the type of arrangement, or perhaps the ultimate number of 
investment options available to participants (e.g., a mutual fund 
window that offers access to fifty mutual funds vs. an open brokerage 
structure that offers access to many thousands of stocks, mutual funds, 
and other securities) and, if so, how?

Plan Investment Offerings--Brokerage Windows and Designated Investment 

    4. What are the characteristics of plans that offer brokerage 
    5. Is the number of plans offering brokerage windows increasing, 
decreasing, or remaining relatively constant? If the number is 
changing, why?
    6. What is a typical number of ``designated investment 
alternatives'' offered by a 401(k) plan? Are plans increasing, 
decreasing, or holding constant the number of designated investment 
alternatives that they offer? If the number is changing, why?
    7. Is there any correlation between the trends observed in the 
preceding two questions, and if so, what is the correlation?
    8. At what point might the number of investment options available 
to plan participants warrant treating the options as a ``brokerage 
window'' of some variety, rather than as a menu of ``designated 
investment alternatives?'' Does the detailed investment-related 
information required by the Department's participant-level disclosure 
regulation for designated investment alternatives (vs. brokerage 
windows) affect the answer to this question and, if so, how?

Participation in Brokerage Windows

    9. How many participants, or what proportion of participants, 
typically use their plan's brokerage window? What proportion of a 
plan's total assets typically is invested through the brokerage window?
    10. Do respondents have demographic data on these participants, 
either for a particular plan or more broadly?
    11. Of the participants that use their plan's brokerage window, do 
these participants typically invest all of the assets in their plan 
account through the window, or some proportion of their assets?
    12. What types of restrictions, if any, are typically made on 
brokerage window participation (e.g., minimum account balances, minimum 
dollar amounts that may be transferred to a brokerage window, maximum 
percentage of account balance that may be invested through a brokerage 
window, etc.)?
    13. Is there evidence of good or poor decision-making and outcomes 
by those participants using brokerage windows? What types of evidence 
are available?

[[Page 49472]]

    14. What benefits accrue to participants that invest through 
brokerage windows? Do participants who do not invest through the 
brokerage window benefit from having a brokerage window option in their 
plan, and if so, how?

Selecting and Monitoring Brokerage Windows and Service Providers

    15. How many vendors does a plan fiduciary research or contact, on 
average, when deciding whether to include a brokerage window feature? 
How do vendors typically market brokerage windows to their existing or 
potential plan clients?
    16. Do plan recordkeepers typically require the use of their own or 
affiliated brokerage services, or are plan fiduciaries able to shop for 
brokerage windows provided by multiple vendors? Are there ways in which 
brokerage window providers favor or encourage investment in proprietary 
funds or products through brokerage windows?
    17. What factors do plan fiduciaries consider and what challenges, 
if any, do they face when deciding whether to include a brokerage 
window and who should provide the window?
    18. What are the most common reasons for adding a brokerage window 
feature (e.g., flexibility and increased investment options for 
participants, to facilitate the ability of participants to work with an 
adviser or a managed account provider, etc.)? What role, if any, do 
concerns about fiduciary responsibility or disclosure obligations play 
in deciding whether to add a brokerage window?
    19. When a plan fiduciary selects a brokerage window feature for a 
plan, does the plan fiduciary typically enter into a contract for this 
service, on behalf of the plan? If so, who are the parties to the 
contract? If not, why not?
    20. Do plan participants themselves commonly contract with the 
vendor when they choose to participate in the brokerage window (either 
in lieu of, or in addition to, a contract with a plan official) and, if 
so, what role, if any, does a plan fiduciary play in this process?
    21. What role, if any, do plan fiduciaries play in the selection of 
brokers, advisers, or other service providers to a brokerage window? 
How do plan fiduciaries monitor the performance of these service 
providers if at all?

Fiduciary Access to Information About Brokerage Window Investments

    22. How do plan fiduciaries monitor investments made through their 
plan's brokerage window, if at all? For example, do plan fiduciaries 
have access to information about specific investments that are selected 
or asset class or allocation information?
    23. Do fiduciaries view this information as important to 
effectively monitoring the inclusion of a brokerage window feature in 
their plan? If applicable, how often do plan fiduciaries request and 
review such information?
    24. What, if any, technological or other challenges exist that may 
reduce the feasibility, or increase the cost, of compiling this type of 
information for plan fiduciaries? Can respondents quantify such costs?

Brokerage Window Costs

    25. What are the most common costs associated with participation in 
a brokerage window (e.g., account fees, brokerage commissions, etc.), 
and what dollar amounts are typically charged? Are there costs to 
including a brokerage window that usually are borne by the plan sponsor 
or by the plan, rather than by individual participants who use the 
brokerage window?
    26. To what extent are brokerage windows effectively subsidized by 
plan participants other than those participating in the brokerage 
    27. How do the costs of investing through a brokerage window 
typically compare to investing in a plan's designated investment 
alternatives? How do the costs compare to investing outside of the 
plan, e.g., in an IRA?
    28. How significant of a factor to plan fiduciaries are these costs 
when deciding to add a brokerage window to their plan? How do plan 
fiduciaries monitor or oversee the fees and costs of a brokerage 
window, available investments, and related services? How much 
discretion does a plan fiduciary have in negotiating brokerage 
commissions and other costs that presumably cannot be controlled by 

Disclosure Concerning Brokerage Windows and Underlying Investments

    29. Is the information required to be disclosed about brokerage 
windows by the Department's participant-level disclosure regulation 
sufficient to protect plan participants? Is this required information 
more or less than plans disclosed prior to the effective date of the 
regulation? Does this information usually come from plan administrators 
or from a third party, such as plan service or investment providers? 
What additional information, if any, is or should be disclosed to 
    30. Is different or additional information disclosed to 
participants after they elect to participate in a brokerage window and, 
if so, what information?
    31. The Department has said that disclosures regarding brokerage 
windows or similar arrangements under the participant-level fee 
disclosure regulation must, at a minimum, provide sufficient 
information to enable participants and beneficiaries to understand how 
the brokerage window works (e.g., how and to whom to give investment 
instructions; account balance requirements, if any; restrictions or 
limitations on trading, if any; how the brokerage window differs from 
the plan's designated investment alternatives) and who to contact with 
questions. See FAB 2012-02R at Q&A 13. Do these disclosures regarding 
how the brokerage window differs from the plan's designated investment 
alternatives typically include a description of the different risks and 
costs of investing through a brokerage window compared to investing in 
a designated investment alternative? Also, do the disclosures typically 
include a description of differences in fiduciary duties owed to 
participants investing through a brokerage window compared to investing 
in a designated investment alternative?
    32. In a recent report entitled, 401(k) PLANS: Improvements Can Be 
Made to Better Protect Participants in Managed Accounts, GAO-14-310 
(June 2014), the United States Government Accountability Office (GAO) 
recognized that managed account or similar services could be available 
to participants through brokerage windows. GAO recommended that the 
Department, among other things, amend regulations under title I of 
ERISA to require plan sponsors who offer managed account services to 
provide participants with standardized performance and benchmarking 
information on managed accounts. For example, one GAO suggestion is 
that plan officials could be required to periodically furnish each 
managed account participant with the aggregate performance of 
participants' managed account portfolios and returns for broad-based 
securities market indices and applicable customized benchmarks. To what 
extent is the GAO recommendation feasible and advisable for 
participants who access managed account services with or without a 
brokerage window?

The Role of Advisers

    33. How often do plan fiduciaries engage advisers to assist with 

[[Page 49473]]

about whether, and what type of brokerage window to include in their 
    34. How often do plan participants use an adviser or a provider of 
managed account services to help them make investments through a plan 
brokerage window?
    35. Do plans generally make advisers or managed account providers 
available to participants for this purpose and, if so, do the advisers 
or managed account providers typically contract with the plan or with 
the participant?
    36. How often do plan participants independently select advisers or 
other providers to assist with their investments through the brokerage 
window? Are plan fiduciaries, recordkeepers, or other service providers 
generally aware of these arrangements?

Fiduciary Duties

    In connection with the issuance of FAB 2012-02 and FAB 2012-02R, 
the Department became aware of the possibility that plan fiduciaries 
and service providers have questions regarding the nature and extent of 
ERISA's fiduciary of duties under section 404(a) of ERISA in connection 
with brokerage windows in plans intended to be ``ERISA 404(c) plans.''
    37. Do these questions indicate a need for guidance, regulatory or 
otherwise, on brokerage windows under ERISA's fiduciary provisions? For 
instance, is there a need to clarify the extent of a fiduciary's duties 
of prudence, loyalty, and diversification under section 404(a) of 
ERISA, both with respect to brokerage window itself, as a plan feature, 
and with respect to the investments through the window? If guidance is 
needed, please try to identify the precise circumstances in need of 
guidance. If no guidance is needed, please explain why not.

Annual Reporting and Periodic Pension Benefit Statements

    38. The annual reporting requirements contain a special provision 
for plans with brokerage windows. Specifically, subject to certain 
exceptions, the Schedule H allows plans to report certain classes of 
investments made through a brokerage window as an aggregate amount 
under a catch-all ``other'' category rather than by type of asset on 
the appropriate line item from the asset category, e.g., common stocks, 
mutual funds, employer securities, etc. Should this special provision 
be changed to require more detail and transparency regarding these 
investments? If so, what level of transparency is appropriate, taking 
into account current technology and the administrative burdens and 
costs of increased transparency?
    39. ERISA section 105 requires plans to furnish benefit statements 
at least quarterly in the case of participant-directed individual 
account plans. How do these benefit statements typically reflect 
investments made through brokerage windows?

    Signed at Washington, DC, this 7th day of August 2014.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2014-19832 Filed 8-20-14; 8:45 am]