If you’re a fan of the tv show “The Simpsons,” you might remember an early episode where Homer Simpson launched a crusade against every public safety issue in the city. The result was practically every square inch of the town contained signs alerting people to every dip, pothole, and other nuisance on the roads. After watching that episode again recently (we won’t admit which one of us got sucked into the tv marathon), we were reminded of a first year torts class in law school that discussed the efficacy of public safety notices. The professor made the comment, “A wealth of information leads to a poverty of attention.”
That comment is especially fitting with respect to ERISA fee disclosures, particularly regarding defined contribution plans. Recently, the DOL requested information and comments about self-directed brokerage accounts (“SDBAs”). The DOL’s history with trying to provide guidance on SDBAs provides a great illustration of the difficulty of determining how much information is too much. On one hand, the DOL has been concerned that defined contribution plan participants will be unable to navigate the wide universe of investment options available under SDBAs unless strict procedural rules are in place. On the other hand, the plan sponsor community has tried to make clear that rank-and-file employees typically are not interested in SDBAs. Instead, more sophisticated investors request this feature, and they do not need a detailed protective regime. The DOL, to its credit, has recognized the different points of view on this issue and has sought input to help develop a balanced approach to regulating SDBAs.
DOL’s Early Attempts to Regulation SDBAs
As background, ERISA’s fiduciary duties require plan sponsors to offer a diverse menu of investment options to participants in defined contribution plans. Plans typically contain a packaged menu of options that are called Designated Investment Alternatives (“DIAs”). With DIAs, the plan sponsor compiles a list of funds, from which the plan participants can select for investment of their plan contributions. As with any benefit plan governed by ERISA, plan fiduciaries are required to act prudently for the exclusive benefit of plan participants. As such, plan sponsors must monitor the DIAs to ensure they remain prudent investments and make certain the funds continue charging reasonable fees for their services. Further, participants must have enough information to make an educated decision as to which fund to direct investment, a responsibility that additionally falls to the plan fiduciary. Required disclosures include information regarding the prior performance of the fund, comparative benchmarks, and fee amounts.
In addition to DIAs, plans may offer participants the option to look outside the plan for alternative funds in which to invest. When participants elect this method, it is referred to as a Self-Directed Brokerage Account (“SDBA”). SDBAs place the burden of making investment decisions on the participant, giving control over where their money will go. SDBAs actually originated to meet the demands of more sophisticated employees who (in theory) are sophisticated enough to analyze a wide range of investment options on their own. They thought that they could make better investment decisions than their employers and wanted their employers out of their investment decisions and financial planning. The people who demanded SDBAs in many ways were similar to the types of participants who would fall into a top-hat plan select group eligible to participate in nonqualified deferred compensation plans.
In terms of fiduciary standards, however, allowing participants the freedom to fail may not be either prudent or in their best interest. The DOL’s concern initially appears to have been that plan fiduciaries use SDBAs to shirk some of the more onerous fiduciary duties by placing these kinds of investment decisions in the hands of participants.
To address those potential concerns, the DOL issued FAB 2012-02 in May of 2012. The question-and-answer-styled bulletin explained that where high volumes of SDBA participants began investing in the same fund, compliance with fiduciary duties would require monitoring and disclosure similar to that associated with DIAs. The guidance failed to provide any definitive threshold, beyond which the additional disclosures would be required. In the midst of this uncertainty, sponsors and brokers feared the heightened duties would apply to nearly every fund in which SDBA investors participated. Given that the entire universe of investment funds is open to these participants, the list could have been extensive. As a result, plan sponsors and brokers expressed widespread alarm over the content of the guidance.
Because of their concern, a mere month later, the DOL issued a revision removing all of the offending requirements, but maintaining a tone that suggested a general distrust of self-directed brokerage accounts. The revision additionally explained that the DOL would keep the topic open, returning to it later for further discussion.
Recent Request for Additional Information
That time is upon us. In the DOL’s recent request for information regarding SDBAs, the DOL has included questions concerning the following:
- The number of plan participants who opt for an SDBA;
- Demographic information about those participants;
- Comparative analysis of outcomes and costs for SDBAs and DIAs;
- The fiduciary to participant and the fiduciary to broker relationships;
- The amount of information available to participants;
- Fiduciary knowledge of their duties with respect to SDBA participants.
In the introductory portion of its information request, the DOL cites the debate regarding the overall merits of allowing SDBAs in defined contribution plans. On one hand, the DOL cited articles that indicated the need for fiduciaries to analyze thoroughly the different investment options available in an SDBA before making them available to participants, essentially to protect participants from themselves. In essence, the DOL provided support for its initial position on the topic. On the other hand, the DOL acknowledged commentary that explained that brokerage windows actually benefit both sophisticated and unsophisticated participants. The reason is that SDBAs reduce the need for a plan to provide a large number of DIAs in order to satisfy specific investment option demands by more sophisticated participants.
What the Future May Hold
It is unclear where the DOL will go from here. In the past, the DOL showed clear apprehension with respect to the use of SDBAs, and it appears that the DOL still has some of those concerns. The DOL should be applauded, however, for understanding the counterargument and reaching out to the industry to assist with determining the extent of new procedural requirements for SDBAs. As of now, the DOL is only requesting information. While the future remains uncertain, it appears that additional guidance will be coming soon.