PLANADVISER - July/August 2019 - 49

Vanguard's institutional investor group, in Valley Forge,
Pennsylvania, and author of the firm's annual " How America
Saves " report. Not only allowing brokerage window investors
to trade on their own, some plans let them engage outside
investment managers for custom portfolio management.
" There's typically a group of participants who can't live
without a certain fund or, less often, things such as direct
real estate, or timber and logging vehicles, " says Julie Stapel,
a partner in the Chicago office of law firm Morgan Lewis &
Bockius LLP. " Or a sponsor might acquire a business, and the
401(k) plan along with it. The sponsor can't keep adding to
the fund lineup, so it says, 'That fund from your prior plan
won't be on the main lineup, but you can have it through the
brokerage window.' "
A brokerage window is more apt to be found at larger
plans. In a special report on the feature's use in DC plans,
Vanguard noted the median age of brokerage participants
to be 52 years vs. 45 years overall and the median account
balance to be $250,000 vs. $26,000.
" The people who self-select into the brokerage window
are those who feel more confident in making investment
decisions, and we see higher utilization among lawyers,
engineers and airline pilots, " says Veneruso.
Several observers also cited the popularity of brokerage
options at medical practices.
" The trend toward simpler 401(k) menus is great for many
people, but there are many reasons a 50-year-old might want
to own a long bond or emerging markets equity fund, which
may not be available to them in a shrinking core menu, "
says Nathan Voris, managing director at Schwab Retirement
Plan Services Inc. in Ridgefield, Ohio.
A look at the big DC picture, though, reveals that brokerage
options appear in just trace amounts. King says that, while
29% of all participants are offered a brokerage window, just
1% actually use it. Even in the plans sponsored by investment
management firms, where participants' investment acumen
would arguably be highest, a recent Callan study showed
allocation of assets to brokerage windows to be just 3%.
Schwab and Vanguard both report that the most popular
holdings of individual stocks these days are top tech names
such as Apple, Amazon, Facebook and Google-names that
are already present in a big way in index funds. Also popular
are Standard & Poor's (S&P) 500 index funds and exchangetraded
funds (ETFs).
For some participants, a brokerage window could be a
step backward: " It's heartbreaking to see a participant who
owns a fund through a brokerage window and is paying
retail fees, when it's available through the 401(k) plan at an
institutional fee, " Stapel says.
One important, distinctive feature of brokerage windows
is they permit use of an outside adviser. Schwab regularly
reports on brokerage window activity, and about 20% of
users engage a third-party portfolio manager. " For advisers
working with individuals, it's a great opportunity, " Voris
says. " They can look at the participant's outside holdings
and fine-tune his overall asset allocation. "
Plan advisers follow sponsors' instructions to add a
brokerage window to their plan but do not seem happy
about it. " They have to be offered to all the employees-not
just the most engaged or educated or highest-income who
can handle the most risk, " says Brian Hanna, a partner in
Dublin, Ohio, firm Everhart Advisors, a finalist for 2018
PLANSPONSOR Retirement Plan Adviser of the Year in the
Mega Team category. " If professional money managers have
difficulty outperforming benchmarks over long periods, can
we expect the individual participant to do any better? " He
prefers to identify what options participants are looking for
and work with a plan's committee to add them to the lineup.
Brokerage options may
Brokerage
options may
be like gym
memberships:
undertaken
with initial
enthusiasm
but insufficient
follow-up.
be like gym memberships:
undertaken with initial
enthusiasm but insufficient
follow-up. " People
buy investments and hold
onto them and don't want
to sell when they should, "
says John Ludwig, founder
and president of LHD
Retirement,
in Indianapolis.
" They think it should
be a day-traded account,
and then they don't, and it
goes back and forth. "
" My personal view is
that I discourage brokerage
windows, but there are
some groups that are
adamant about it, " says
Chad Larsen, founder and
CEO of MRP, retirement
plan specialists in Denver. " My experience has been that
very few folks have the time, sophistication and investment
knowledge to make good long-term portfolio decisions over
and over. In picking individual stocks, people's emotions can
get the best of them, and things will end poorly. " Still, Larsen
adds, " if a sponsor is bound and determined, we put it in. I'm
not going to die on my sword for a brokerage window. "
Even though investing through brokerage windows
may add risks and costs for participants, sponsors have
relatively few fiduciary obligations.
" Brokerage windows
occupy a regulatory no-man's land, " Stapel says. " ERISA
[Employee Retirement Income Security Act] does not recognize
brokerage windows as part of the official designated
alternatives; there aren't the same resources or capacity to
look at the 10s of thousands of investments that might be
available. " Sponsors do have the latitude, though, to exclude
trading in single stocks, bonds or ETFs, as well as company
stock, and to limit participants' choices to mutual funds.
As to the absence of regulation, Stapel says, " Instead,
we have interpreted the Department of Labor [DOL]'s
view that sponsors need to exercise diligence in selecting
the brokerage provider. " That means a thorough review
of the fees to be charged and the quality of execution of
transactions. -John Keefe
planadviser.com July-August 2019 | 49
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