According to an Aon Hewitt study reported in the Wall Street Journal, more defined contribution plans like 401ks are offering a brokerage window. While costs are higher for participants and returns lower, there are some benefits.
2015 – 40%First the numbers. Plans offering participants in the DC plan have tripled since 2001:
- 2011 – 29%
- 2001 – 12%
Just 1-4% of participants use a brokerage window which offer greater investment choices than a plans core line-up of so called designated investment alternatives (DIAs), sometimes thousands of mutual funds and ETFs. Users tend to be older with higher account balances and generally have lower returns than those using a plan’s core line-up.
Plan sponsors have a fiduciary obligation to prudently select and periodically monitor DIAs but have no such obligation for investments in a brokerage window. The DOL will look carefully, though, if a plan uses a brokerage window for a significant percentage of assets to potential skate the prudent selection and monitoring rules. To that end, IBM, which has 12% of DC plan assets in a brokerage account, limits the selection to 168 funds from six companies and actually monitors the investments.
So what’s good about a brokerage window and why should a plan sponsor consider offering it? According to UCLA professor Shlomo Benartzi in his seminal book “Save More Tomorrow”, 90% of participants want someone else to manage their money, 9% want to tinker using core funds and just 1% want the freedom offered in a brokerage window. He suggests offering just 7-9 core funds. Offering a brokerage window allows plans to limit core line-ups while silencing the vocal minority. In fact, plans offering a brokerage window have 8% fewer core funds.
And according to Columbia professor Sheena Iyengar, plans with fewer funds enjoy better participation and participants make better decisions.
