A number of retirement plans offer a self-directed brokerage account window option for plan participants. In order to be legal, the brokerage window option has to be offered to all participants within the plan on a non-discriminatory basis. In practice, few participants (less than 1% in most plans) tend to access brokerage window options. Is offering a brokerage window option a good idea? Most of the time, probably not. Here's why:
- Most of the interest in self-directed brokerage accounts tends to come from executives who can afford to purchase solid investment advice. These individuals could just as easily execute similar investment strategies more effectively using outside brokerage accounts, avoiding the limitations and restrictions imposed by retirement plans.
- These executives are often convinced of the merits of a brokerage account window by their financial adviser, who may benefit financially from the use of a brokerage account window but not from investments in the plan. This is a clear conflict of interest that may not be beneficial to the executive.
- An employer’s fiduciary liability would appear to be much higher in a plan that offers brokerage account windows. The risk doesn't necessarily stem from executives who are able to hire investment advisers, rather, it comes from those individuals who aren't getting competent investment advice or are investing on their own without an adviser.
- Brokerage windows make it easier for unsophisticated investors to harm themselves. One of the benefits of investing in a 401(k) plan is the rigorous nature of the analysis applied to the investment options, the fiduciary procedure for selecting them and the types of investments allowed. None of this exists in a brokerage window situation where a participant could be receiving less than competent investment advice or investing on their own.
- Last year the Department of Labor opined that retirement plan fiduciaries must prudently select the providers of participant brokerage accounts (the broker-dealers). As with any other provider, this would include the evaluation of the various services and related costs. This would seem to make the practice of offering brokerage account windows much less appealing to the employer plan sponsor.
Where might a brokerage window option be most appropriate? In doctor or dental practice groups where the majority of the plan participants are either doctors or dentists able to purchase competent investment advice.
Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF). Mr. Lawton was named as a Top 100 Retirement Plan Adviser by PLANADVISER and a Top 300 Retirement Plan Adviser by 401(k) Wire. Mr. Lawton may be contacted at
