If employer sponsors of retirement plans want to reduce their fiduciary responsibility, one way that’s recently been proposed is for them to offer their participants a brokerage window with expanded investment plan options. Or at least that’s a path forward that’s been suggested after the Supreme Court’s recent “Hughes v. Northwestern University” decision, said former Department of Labor attorneys at the Wagner Law Group in a new blog today.
The court’s decision in Hughes held that defined contribution plans have a fiduciary duty to determine the prudence of all the investment alternatives on the plan’s menu. It’s not enough to have a long, diverse list of options (including some low-cost ones) if the menu might confuse participants.
Brokerage windows, when posed as a possible solution to this problem, would allow plan participants to choose their own investments within a self-directed retirement account, beyond the menu of plan alternatives—and typically without investments being vetted or monitored by plan fiduciaries.
“Brokerage windows could provide an opportunity to offer unfettered investment options coupled with a limited curated investment menu that fiduciaries could readily evaluate and monitor,” said Wagner counsel Mark Greenstein. As a former acting division chief for the U.S. Department of Labor, Greenstein produced advisory opinions on fiduciary responsibility and prohibited transaction prohibitions.
“While there is limited regulatory guidance on the use of brokerage windows, the [DOL’s] ERISA Advisory Council recently examined the law and concluded that no further regulation is needed,” Greenstein wrote.
Instead, the council’s report to the U.S. labor secretary suggested that the DOL conduct additional fact-finding on participant needs in brokerage window-only plans, he noted.
The Northwestern University plans at issue in the Supreme Court’s Hughes decision offered more than 400 options. The court rejected the notion that fiduciary duties were met if there were enough prudent low-fee options available for participants to design diversified investment portfolios, the Wagner attorneys said.
“Going forward, the high standard of fiduciary responsibility embraced by the court in Hughes may discourage fiduciaries from designating numerous investment alternatives on participant investment menus,” said Ivelisse J. Berio LeBeau, a Wagner partner and a former DOL attorney in the Office of the Solicitor who works with benefit plan sponsors and fiduciaries in federal and state court actions alleging breach of fiduciary duty.
“Fiduciaries considering less robust plan investment menus, however, may also be concerned that reduced investment options could discourage participation or could trigger challenges from participants that investment options are too restrictive,” Berio LeBeau added.
The question is whether a brokerage window would be a solution for employers trying to reduce their fiduciary responsibility, she said.