The use of participant-driven “brokerage windows” in 401 (k) plans and the like has so far been limited, but some plan sponsors are giving these investment platforms a second look. providing employees with access to environmental, social and governance (ESG) targeted mutual funds without adding additional funds to the plan’s portfolio of investments.

Although brokerage windows – also known as self-directed brokerage accounts (SDBAs) – allow plan members to invest their account funds in stocks, bonds and other securities, plan sponsors often limit investments. available to mutual funds, referring to the platform as a mutual fund window.

“ERISA [the Employee Retirement Income Security Act’s] primordial duties of prudence and loyalty
always apply to a trustee’s decision to make [brokerage windows] available, taking into account the nature and quality of the services provided by the devices, ”noted the human resources consulting firm Mercer.

TSP to open a window

In June, the Thrift Savings Plan (TSP), which operates as a defined contribution plan for 6.3 million federal civilian employees and members of the military, said it
would offer ESG funds in a new mutual fund window which will include more than 5,000 funds. This feature will be available next summer.

Lisa Woll, CEO of US SIF, a business group for the sustainable investing industry, said the group has been in talks with TSP to add sustainable offerings for more than a decade, Barron reported. Plan participants “can’t get ESG options until they have this platform,” she said.

In another sign that brokerage windows are receiving more attention, last month the Department of Labor’s (DOL) Advisory Council on Employee Welfare and Pension Schemes, commonly referred to as the ERISA Advisory Board, announced held hearings to discuss developments regarding SDBAs and whether further regulation of window brokerage was warranted.

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Limited adoption

Vanguard’s investment company
How America is saving 2021 The report found that among the 1,700 employer-sponsored plans for which it provided record keeping services last year, 20% offered a self-directed brokerage window, rising to 38% among plans with at least 5 000 participants.

However, in plans offering a self-directed brokerage feature, Vanguard reported that “only 1% of these participants used the feature in 2020. In these plans, around 2% of the plan’s assets were invested in the self-directed brokerage feature. “.

Similarly, in the January 2021 survey by asset management firm Schroders of 230 pension plan members,
37% said they were offered ESG-related investment options by their employer, while 9% of participants who were aware of their plan’s ESG options invested in these funds. In plans that did not currently offer an ESG option, 69% of respondents said they could increase their overall contribution rate if they had access to an ESG fund.

“Although participant membership in brokerage windows is relatively low, it is
an important tool that plan sponsors can use to meet the unique investment needs of plan members“said Chantel Sheaks, vice president of retirement policy at the US Chamber of Commerce.
ERISA Advisory Board June 24.

The demands of plan participants, she noted, “include the desire for more varied investment options beyond the core range or the demand for a specific type of investment, such as the Sharia investment, funds that do not include specific investments or a global ESG investment “.

Sheaks added that “including such an investment as a core investment option may not make sense for the plan if few people use it. Because of the work involved in implementing them properly, plan sponsors do not take them lightly ”.

More choice, more risk

While brokerage or mutual fund windows are one way to provide access to ESG investments, a common concern is that once a window is opened, participants might be required to invest in non-speculative hedge funds. High risk ESGs that put their money at great risk. .

Alison Borland, executive vice president of wealth solutions and strategy at Alight Solutions, a pension services company, told the ERISA advisory board that “while brokerage windows can offer plan members new investment opportunities,
they are not suitable for everyone. Participants take full responsibility and risk for the investments they choose, so they should be prepared to manage and closely monitor this part of their plan. ”

She added that “if participants are not experienced investors, do not have the time to do proper research, or seek professional advice, they can mismanage their 401 (k) assets and make riskier decisions. that the ranges of plans are designed. to help alleviate.

Kent Mason, a partner at Davis & Harman law firm in Washington, DC, said the platforms
may also reduce participants’ risk. “Brokerage windows allow plans to avoid the very real risks of confusing or even crippling a large portion of their employees,” which can occur when additional funds are placed in the core investment range, he said. he noted, “while satisfying the needs of a smaller group of participants for more investment flexibility.”

Kevin Mahoney, Business Development Officer at FinDec, a provider of plan advisory services and TBA, said that “giving plan members more choices about where to invest the money they are saving for retirement in their retirement years. benefits plan at work can be positive ”.

He noted that “the volume of trade is increasing within SDBAs and average account balances are increasing modestly.
self-managed accounts carry potential risks, especially if participants do not understand investments or how markets tend to work over the long term. “

Reduce risk exposure

To facilitate the ability for plan sponsors to offer brokerage or mutual fund outlets when they deem it appropriate, while reducing unnecessary liability risks for plan sponsors and financial risks for members, Sheaks urged the DOL to:

• Clarify the application to brokerage windows of section 404 (c) of ERISA, which requires plans to disclose certain information to plan members about the plan’s investment options.

• Publish tip sheets to help plan sponsors understand what is involved in selecting, monitoring and terminating a brokerage window option.

• Provide template language and checklist disclosures suggested by participants.

Frank Porter, president of the American Society of Pension Professionals & Actuaries, a national organization for pension professionals, said that “plans usually set a percentage limit on the portion of an individual’s account that can be placed in a self-directed brokerage window.

Plan sponsor trustees can add other restrictions to protect employees from undue risk, noted Porter, also a relationship manager at Empower Retirement, a pension plan record keeping company. For example, they can “limit investments to items such as no transaction fee / no transaction fee only funds”.