Brokerage window

What a brokerage window is

Most 401(k) plans offer a menu of funds chosen by the plan’s fiduciaries. A brokerage window opens a brokerage account inside the plan, so a participant can pick from a much wider range of investments. The money stays in the 401(k) and keeps its tax treatment.

Under the Department of Labor’s participant disclosure rule, investments reached through a brokerage window are not “designated investment alternatives”. The plan does not have to give fund-by-fund performance and fee data for them. It does have to explain how the window works, any fees for using it, and any commissions or trading costs.

Why it matters to employers

Employees who want more control ask for it, and it is a common question when companies compare providers. Offering a window is a plan design decision with fiduciary aspects. The individual investments inside the window are generally chosen by the participant and are not monitored by the plan’s fiduciaries, but the decision to offer the window and the choice of provider must be prudent, and its costs must be reasonable. (DOL Field Assistance Bulletin 2012-02R, Q&A 39)

Example

A plan offers 20 core funds and a brokerage window. An employee keeps 80% of her balance in a target date fund and moves 20% into the window to buy exchange-traded funds of her choice. Her plan statement shows both.

Common mistakes

• Treating the window as free of fiduciary responsibility.

• Not disclosing the window’s fees and trading costs to participants.

• Offering the window in a way that is only practical for higher-paid employees, such as a high minimum balance.

• Assuming a 3(38) investment manager monitors what participants buy in the window.

• Describing window investments to employees in a way that sounds like a recommendation.