The U.S. Department of Labor (DOL) recently issued a warning about its intention to launch an investigative program into those plans that offer cryptocurrency and related products as investment options. The DOL’s investigative program would include those products offered through brokerage windows, implying that plan fiduciaries might be responsible for those investments. Therefore, plan fiduciaries need to carefully consider their potential responsibilities concerning brokerage windows, both concerning cryptocurrency and investments.
Understanding Brokerage Windows
Brokerage windows or designated investment alternatives allow participants in a 401(k) plan or another type of participant-directed retirement plan to invest in a wider range of investments than the options that the plan fiduciaries have chosen. These alternatives often are attractive for participants who are sophisticated investors or those who work with an investment advisor who recommends certain investments to complete their portfolios. Brokerage windows also are useful for participants who wish to invest based on religious or ethical principles.
Not all 401(k) or retirement plans offer brokerage windows, nor are they required to do so. However, DOL regulations and guidance address some aspects of brokerage windows, as investments made through these alternative means are not typically subject to the same fiduciary standards or disclosure obligations as the plan’s regular investments.
Plan fiduciaries are not relieved of all fiduciary duties regarding investments made through brokerage windows in retirement plans. For example, fiduciaries are responsible for:
- Whether to offer a brokerage window within the plan
- How the brokerage window is structured, including expenses
- Disclosure of a description of any brokerage windows available under the plan to participants
- The general duties of prudence and loyalty, considering the nature and quality of the services provided under the brokerage window
DOL’s Cryptocurrency Guidance
DOL’s Compliance Assistance Release 2022-01 or Cryptocurrency Guidance advised plan fiduciaries that if they allowed investments in cryptocurrency or related products, they must be prepared to explain how those investments meet their duties of prudence and loyalty under ERISA. The DOL specifically stated that it was not only concerned about direct cryptocurrency investments but also about other products that allow cryptocurrency investments. This statement implies that fiduciary responsibilities could extend to include investments offered through brokerage windows.
The possible expansion of fiduciary duties to encompass the investment options in brokerage windows also raises practical concerns. For instance, thousands of investments may be available through a brokerage window. Suppose fiduciaries are responsible for monitoring and screening for cryptocurrency and related investments. In that case, they could potentially have to spend significant amounts of time screening thousands of investment options beyond their plan offers. Although fiduciaries typically can limit the types of investments offered through brokerage windows, it may be highly impracticable to exclude all investments whose values are tied to cryptocurrency.
Although DOL’s Cryptocurrency Guidance does not specify the duties of fiduciaries concerning brokerage windows, the potential implications of the Guidance are significant. As a result, further guidance from DOL is sorely needed on this issue.
Brokerage Windows and ERISA § 404(a)
ERISA § 404(a) is also instructive on fiduciaries’ duties in terms of brokerage windows. This section generally absolves plan fiduciaries of liability for the individual investment decisions that participants choose to make. DOL regulations also clarify that § 404(a) does not relieve fiduciaries of their duty of selecting and monitoring brokerage windows prudently. Plan fiduciaries must carefully screen and monitor any brokerage windows they choose as an optional feature for their plan participants. With the uncertainty arising from the DOL’s Cryptocurrency Guidance, this duty may require more attention than previously thought.
At a minimum, plan fiduciaries who offer or plan to offer brokerage windows as an option for plan participants should carefully review the following:
- Whether the fees or commissions charged are reasonable
- Whether the brokerage window poses any conflict of interest
- Whether restricted categories of investments within the brokerage window are appropriate for plan participants and consistent with similar clients
- Whether written materials for the brokerage window adequately and accurately describe the option for plan participants
- Whether any limitations on the brokerage window are appropriate for diversification reasons, based on the number of plan participants who chose the brokerage window as an investment option
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