Tag Archive for: best interest

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Brokerage Windows–A Matter of Prudence

“Several of my plan sponsor clients are considering adding a brokerage window to their plans’ investment line ups. Is that a good idea?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Georgia is representative of a common inquiry related to 401(k) plan investments.

Highlights of Discussion

Adding a brokerage window to a plan’s investment menu is not a question of good or bad, but of prudence and loyalty under ERISA’s best interest standards. As clearly stated in Q&A 39 of Field Assistance Bulletin 2012-02R, plan sponsors that utilize brokerage windows that enable participants and beneficiaries to select investments outside of their plans’ designated investment alternatives (DIAs) have a statutory and ongoing fiduciary duty to evaluate whether such options are prudent investment alternatives for their plans under ERISA Sec. 404(a).

Further, with respect to participant disclosures related to brokerage windows, a plan sponsor must provide a(n)

  1. General description of the brokerage window (or like arrangement) sufficient enough to enable participants and beneficiaries to understand how the window works;
  2. Explanation of any fees and expenses that may be charged against the individual account of a participant or beneficiary on an individual, rather than plan-wide, basis in connection with the window; and
  3. Statement of the particular service and dollar amount of fees and expenses that actually were charged during the preceding quarter against the participants’ accounts in connection with the window.

While the DOL, clearly, does not prohibit the use of brokerage windows within self-directed plans, neither has it given much regulatory guidance on the matter. The ERISA Advisory Council confirmed the lack of solid guidance in a December 2021 study, “Understanding Brokerage Windows in Self-Directed Retirement Plans.”  However, most Council members did not believe that additional guidance in this area was needed. “In this regard, the Council observed that the marketplace seemed to be functioning well.”  The Council did recommend the DOL consider further fact finding related to brokerage-window-only (BWO) plans (i.e., plans that have no DIAs and brokerage accounts are the sole investment option) out of a concern “… that those types of plans may not incorporate the spirit of ERISA’s intent and protections for financially inexperienced employees and may need the Department’s attention …”

With respect to brokerage windows, the question for plan officials is whether such an arrangement, as a whole, is a prudent option for a plan and its participants (not each of the investment alternatives within the window).  That said, it seems the DOL may begin peeking inside the window a bit further. In Compliance Assistance Release No. 2022-01,  the DOL commented to the effect that if plan participants can access investments the agency deems “risky” through a brokerage window, “… plan fiduciaries responsible for … allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks  …”


The DOL will hold plan fiduciaries and other officials to the ERISA standards of prudence and loyalty with respect to offering brokerage windows within self-directed plans. Such individuals and their advisors should be prepared to offer documentation in defense of their decisions and actions.

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Three’s A Crowd Regarding IRA Rollovers

By W. Andrew Larson, CPC

The Securities and Exchange Commission (SEC) finalized new rules (known as Regulation Best Interest or Reg. BI) that address, in part, IRA rollovers for broker-dealers.  This commentator questions the wisdom of inserting now a third governmental agency into the retirement space, which, historically, was overseen by the IRS and Department of Labor (DOL). It seems that if Congress had wanted the SEC in this regulatory mix it would have said so in the first place. I wonder if the SEC has such ample resources it feels impelled to expand their regulatory purview or if, perhaps, this is an attempt to obtain additional funding for these new endeavors.

Under Reg. BI, broker-dealers are held to a best interest standard when making a recommendation to a retail customer. In this context, a “retail customer” does not include a plan sponsor, but it does include plan participants with regard to recommendations to take distributions or roll over assets to IRAs. Arguably, advisors are required to demonstrate how they arrived at a best interest finding and recommendation. Effectively, this regulation is a watered-down version of the vacated DOL fiduciary rules and, while the objective of protecting consumers is admirable, my concern is the propriety of injecting another federal agency into the arena of Employee Retirement Income Security Act (ERISA) enforcement.

The General Obligation of Reg. BI has four components:

  • Disclosure of the relationship and fees (Disclosure Obligation);
  • Duty of care (Care Obligation),
  • Mitigation and disclosure of conflicts (Conflicts of Interest Obligation); and
  • Establishment, maintenance and enforcement of policies and procedures (Compliance Obligation).

The SEC has noted certain considerations are not considered determinative in and of themselves to warrant a rollover recommendation. For example, having more investment elections available within an IRA vis a vis the qualified plan is not considered enough rationale to conclude a rollover would be in the best interest of the investor according to the SEC.

Factors to consider when contemplating a rollover should include items such as, but not limited to, the following:

  • Fees and expenses;
  • Level of service available;
  • Availability of retirement income products and other investment options;
  • Ability to take penalty free withdrawals;
  • Protections from creditors and legal judgments;
  • Administrative convenience;
  • Beneficiary considerations (some qualified plans don’t allow the full range of beneficiary options permitted under statute);
  • Availability of net unrealized appreciation (NUA) opportunities with employer stock,
  • After-tax contributions and the potential for Roth conversions;
  • Required minimum distribution (RMD) requirements (e.g., Designated Roth accounts in 401(k) plans remain subject to RMD requirements); and
  • Any special features of the existing account.

Ultimately, I believe Reg. BI will result in a more nuanced IRA rollover recommendation process where “all or nothing” rollover events will become less common. Future recommendations involving plan distributions and rollovers will require advisors to have a greater understanding of their customers’ retirement plans, and the options and choices among the various money types within the plans. For example, 401(k) arrangements are highly variable by sponsor, each having multiple money types, features and provisions. Clearly, the first step in the Duty of Care process is having a thorough understanding of the distributing plan’s applicable provisions and features, and securing documentation that would support the basis for making any recommendations. But sources for detailed plan information are limited.

Retirement Learning Center (RLC) has a library of over 6,000 plan documents it has analyzed and summarized as “Plan Snapshots,” which can give advisors important plan information necessary to feed the Duty of Care process. Use of RLC’s plan information not only saves time but can be part of the crucial documentation necessary to support a recommendation.

With oversight from the IRS, DOL and now SEC, the rollover landscape is changing and will result in advisors taking a more subtle, thoughtful and documented approach with investors when recommending retirement plan distributions and rollovers.


© Copyright 2024 Retirement Learning Center, all rights reserved