THE FIDUCIARY CORNER: The Perils of 401(k) Brokerage Windows
Gregory L. Ash, Wednesday, November 26, 2008 | Filed under: 401(k) Plans, Fiduciary Duties, Plan Investments
The analysis of a federal district judge last year in a decision dismissing a class action complaint that challenged Deere & Co.’s 401(k) fee practices generated a great deal of excitement about 401(k) brokerage windows. The court seemed to imply that the existence of such an investment portal – through which participants may invest their plan accounts in almost any mutual fund or security – insulated the plan sponsor from claims that the plan’s core funds were too expensive or otherwise imprudent. That analysis is currently being tested as the parties appeal the judge’s decision. It has also drawn a cool reception from the Department of Labor.
The DOL’s unofficial position on brokerage windows came in a recently released series of answers to questions that had been posed by the American Bar Association’s Joint Committee on Employee Benefits (“JCEB”). Although the DOL’s statements were informal and nonbinding, they may cause employers to think twice about offering brokerage windows.
The question posed by the JCEB described a hypothetical individual account plan that was designed to comply with the participant-directed investment rules set forth in Section 404(c) of ERISA. The plan provided a “core” menu of mutual funds that satisfied Section 404(c), as well as a brokerage window that allowed participants to invest in any security issued in the United States. The plan’s SPD warned, “in super-conspicuous and plain language,” that participants were solely responsible for evaluating any “non-core” investments made through the brokerage window. It also explained that any participant who invested through the brokerage window would be deemed the named fiduciary for that investment, and would be responsible for any prohibited transaction that arose out of the investment.
The JCEB asked the DOL whether, under those assumed facts, it was clear that the employer (and any plan fiduciary other than the participant who made the investment decision) would not have a primary duty to consider whether the investment constituted a prohibited transaction under ERISA. The JCEB’s proposed answer was that only the participant would be responsible for any resulting prohibited transaction, and that the employer need not consider whether brokerage window transactions caused such ERISA violations.
The DOL’s staff disagreed. They first concluded that a participant who makes investment decisions under a Section 404(c) plan is not deemed to be a fiduciary merely because he or she does so. They pointed to language in the preamble to the Section 404(c) regulations which indicates that participants do not engage in prohibited transactions in these circumstances. “Therefore, the fiduciary that is responsible for carrying out a participant’s investment directions [e.g., the sponsoring employer] would be exposed to potential liability for causing the plan to engage in a prohibited transaction.”
The DOL apparently believes that plan sponsors (or others in charge of individual account plans) have some responsibility to review individual transactions initiated by plan participants through brokerage windows. Without question, plan sponsors currently are not engaging in this kind of review. Until the DOL issues revised – and realistic – 404(c) regulations, however, employers may be better advised to consider brokerage windows a risk, rather than a panacea.