Plan Progress Webinar: Managing the DC Plan Investment Menu

Providing retirement plan participants with access to a self-directed brokerage window demands the examination of plan demographics to determine if one is appropriate.

For plan sponsors, offering retirement plan participants a brokerage window may be more trouble than it’s worth.

In overseeing investment menus, plan fiduciaries must select the funds best suited for the plan and consider what participants need and what is in their best interest, rather than attempting to satisfy plan participants’ preferences, fiduciary experts explained during “Managing the DC Plan Investment Menu,” a PLANSPONSOR webinar.

Determining what is best requires understanding the plan’s demographics, explained Mat Powers, director for retirement consulting services at Commonwealth Financial Network, a broker/dealer registered investment adviser.

“The fiduciaries responsible for the plan’s oversight have to continue to monitor and assess and evaluate. It’s ongoing,” he said. “In making investment oversight decisions for the plan, it is something that you do need to be informed [about] and understand—the demographics of the participants who are being served by that plan. Have a prudent process for how you arrive at your decision-making and have it considered as part of that process.”

Plan fiduciaries are also grappling with including retirement income products in their investment menus, including annuities, which were permitted by the fiduciary safe harbor in the Setting Every Community Up For Retirement Act.

Kyle Smith, CIO at LeafHouse Financial, explained that plan sponsors should examine adding retirement income products but that these may not be right for every plan. Chief concerns for plan fiduciaries are fee transparency and liquidity, he said.

“As long as there’s sufficient education, transparency around fees and liquidity, we’re comfortable with looking at these types of products and including them in plans where it’s appropriate,” he said. “But it’s not appropriate for every plan by any means and there’s a lot of products that aren’t necessarily the best products out there that are very expensive. It’s still very much early days in terms of including these types of products.”

Powers agreed that plan fiduciaries can’t ignore retirement income products.

Plan sponsors can take the approach of being “thoughtful about what are the income-producing opportunities of the plan and for participants” he said. “You can’t be completely absent of giving that some consideration.” 

Plan fiduciaries are responsible for managing the retirement plan in participants’ best interest, under the Employee Retirement Income Security Act and Department of Labor and IRS regulations.

Fiduciaries must focus on participants’ best interest rather than the hot investing topic, he added.  

“[A] crypto fund is an easy example to throw out there because it has grabbed some people’s attention and people are jazzed by the opportunity to become instant millionaires,” he said. “But at the end of the day, you need to think about: is it in their best interest?”

Plan sponsors must be deliberate in examining whether the brokerage window would be appropriate for the plan, Powers added, noting that plan sponsors face several considerations.

“Expectations [for plan fiduciaries] aren’t necessarily to do due diligence on all of the investments that are offered through that brokerage window—the due diligence is more around the brokerage window itself,” he said. “Does it have reasonable fees associated with it? Are the operational administrative workflows and aspects of that brokerage window reasonable and of enough quality for them to feel it’s a viable option for participants?”

Benjamin Grosz, partner at law firm Ivins Phillips & Barker, explained that the SPARK Institute—a recordkeeper and retirement organization—surveyed the 30 or 40 largest recordkeepers on the prevalence of self-directed brokerage windows, determining that among the retirement plans that are record-kept by large recordkeepers, 13% offered a brokerage window to participants.

He added that the figure is likely lower in the small plan market, and that it varies by industry and plan size.

Grosz said that brokerage windows are often asked for and used by the more sophisticated investors—human resources personnel or senior executives who want to add more esoteric funds—but seldom used by most workers. “With brokerage windows, the rank and file are generally not asking for it and they’re generally not designed for the rank and file,” he said.

A December DOL ERISA Advisory Council on Employee Welfare and Pension Benefit Plans report to Secretary of Labor Marty Walsh found that slightly over 2% of participants with access to a brokerage window use it. Overall, 0.3% of defined contribution plan participants have investments in a brokerage window, the report found.  

The report also found that the average size of retirement accounts that use a brokerage window is $334,263, almost three times greater than the overall 401(k) plan average.

Managing the DC plan investment menu also involves ensuring that the investments available are permitted and that the plan remains viable. 

“There are certain assets which are just by statute not permitted in a retirement plan,” Grosz explained. “It’s not okay to put them in through your brokerage, so you need to make sure of that.”

One such asset could be cryptocurrency, Grosz said.

“I don’t think you get around the issues of crypto by offering it in the brokerage window. I think it’s going to be just as problematic. The DOL’s views are very clear, and I’m not sure how I would—applying your normal prudence [and] loyalty, [fiduciary] standard process—get comfortable with that,” he said.

Grosz advised that, contrary to the perceptions of some in the retirement industry, offering crypto exposure in a self-directed brokerage window is no “panacea” for plan sponsors.

“I’ve heard from time to time in the past some litigators say, ‘maybe the brokerage window is your get-out-of-jail-free card.’ It’s not, and I think the law is clear on that,” he said.

Grosz explained that the DOL has in the last decade “come down hard” on plan sponsor committees that were under the impression that  they “can just offer a brokerage window and not worry about anything else.”