Brokerage windows that allow participants in defined contribution (DC) plans like 401k plans access to funds outside of investments offered within the plan can be troublesome for many reasons but the potential legal liability for record keepers has been highlighted in a recent class action lawsuit filed against Fidelity by participants in Delta Airline’s $7.5 billion DC plan. The issue of brokerage fees is front and center.
The lawsuit alleges that Fidelity received unreasonably high fees just for providing access to funds in the brokerage window which were also claimed to have high brokerage fees. The suit further alleges that Fidelity received “kickbacks” from the plan’s managed account provider, Financial Engines, without providing any services.
Many companies are reluctant to allow brokerage windows within their DC plan as participants can misuse them trading too often while incurring higher than normal fees. But a small, vociferous group may force plan sponsors to provide access to funds not included in the plan’s investment menu to keep the number of options at a reasonable level. Though not used by many participants in most plans, the Delta participants had $2.8 billion of the $7.5 billion of plan assets in brokerage accounts.
Plan sponsors must prudently select and monitor investments offered to participants called “designated investment alternatives” or DIAs. Obviously, a plan cannot review and monitor the thousands of investments offered in a brokerage window so the DOL is concerned when a high percentage of assets are in the window perhaps skirting DIA oversight and liability. Though not named in the lawsuit, does the plan sponsor have the obligation to make sure that fees for brokerage accounts are reasonable like they do for other investments?
Regardless, charging revenue sharing fees for investments within a plan’s menu is common practice to offset administrative costs unless the plan sponsor is willing to write a check or other arrangements are made whether the assets are in traditional mutual funds, managed accounts or even brokerage windows. Managing access to brokerage windows can be costlier than providing access to a plan’s 12-18 funds so additional charges can be defensible. The question of whether fees charged by Fidelity to participants using the plan’s brokerage window were reasonable.
