Borzi Addresses Concerns Raised in Guidance Regarding Brokerage Windows

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By Kristen Ricaurte Knebel  

The Department of Labor is working on a second set of frequently-asked-questions and answers regarding its fee disclosure regime, but the industry should not expect it out before July 1, Phyllis C. Borzi, assistant secretary of labor for DOL's Employee Benefits Security Administration, said June 18 at the SPARK National Conference.

DOL issued its first set of FAQs on disclosures May 7, primarily addressing disclosures required under Section 404 of the Employee Retirement Income Security Act(88 PBD, 5/8/12; 39 BPR 921, 5/15/12). Borzi said that, since the release of the FAQs, there has been some “over-reading and overreacting” to Question 30, which deals with brokerage windows.

In the answer to Question 30, DOL “reiterate[ed] that this brokerage account, or brokerage window, is not a [designated investment alternative]. That's not groundbreaking,” Borzi said. Additionally, the answer reminded people of their fiduciary duty to “prudently select and monitor service providers. So once you choose a service provider, you can't just walk away,” she said.

While the answer may have reminded people of their fiduciary duty, Borzi recognized that the department has not been very clear as to fiduciaries' duties with regard to brokerage windows. Because of that, DOL has been speaking with retirement industry representatives about how they interpret their duty to participants when offering a brokerage window.

“People will come to us and say, 'Well, this was new. We had no idea that we had to monitor brokerage accounts.' I would say to them, 'Well, what did you think your fiduciary duty was: Set it and forget it?' ” Borzi said.

The Need to Monitor.

DOL recognized that asking a plan fiduciary offering a brokerage window to provide disclosures for every investment option in that brokerage window would not make much sense, Borzi said.

DOL was trying “to figure out how to get the kind of disclosure that people need to be able to make their [investment] choices in a way that wasn't overly burdensome for the plan sponsors and plan fiduciaries that offer participants these kinds of accounts,” she said.

Borzi said DOL gave people a safe harbor by saying that, “if you have either no DIAs or you have some DIAs in this brokerage account, you need to look at what people are actually selecting, because if the point of this is disclosure, then you have to give people some information about the fees and other forms of compensation that are associated with their choices.”

Borzi said the bottom line is that fiduciaries need to monitor the brokerage accounts and, if they see a majority of their participants selecting a particular investment, consider making some of the investment options a designated investment alternative.

“If, in this monitoring of what people are doing in the brokerage account, you see patterns begin to emerge, then you need to consider--consider being the operative word--whether or not it makes sense to designate some or all of the choices that people make, if a lot of them are choosing the same things, as a DIA. That is all we said,” Borzi told the audience.

By Kristen Ricaurte Knebel