What’s in the Window?

Defined contribution plans’ self-directed brokerage windows used to be a generally quiet component of plans’ investment offerings.

But in March 2022, regulators at the Department of Labor published the Employee Benefits Security Administration’s “Compliance Assistance Release No. 2022-01: 401(k) Plan Investments in ‘Cryptocurrencies.’” The release cited concern with the growing number of firms marketing cryptocurrency investments to 401(k) plans as potential investment options for participants as in-plan options or through brokerage windows.

PLANSPONSOR’s 2023 Plan Benchmarking Report, which surveyed 2,562 plan sponsors from a broad variety of U.S. industries, found brokerage windows are not terribly widespread. Among survey respondents, 22.6% reported that their plan offers brokerage windows, and another 5.4% reported being offered a mutual fund window.

Many in the retirement plan industry did not expect the CAR’s specific inclusion of brokerage windows and challenged the release’s validity on that point.

“We were very surprised when we saw the guidance put out by the Department of Labor, which indicated that there was an obligation to review, for example, cryptocurrency investments, available under a brokerage window,” says Kent A. Mason, a partner in Davis & Harman LLP in Washington, D.C. “The law is clear that there is no obligation on behalf of a plan fiduciary to review the investments offered through a brokerage window. Essentially, a broad universe of investments can be made available through a brokerage window.”

One group of 11 trade associations, which included the American Bankers Association and the SPARK Institute, among others, wrote to the DOL in April 2022 claiming that the CAR “puts plan sponsors in the untenable position of having to choose between extending their fiduciary responsibility to such investments, contrary to longstanding guidance, or accepting the likelihood of a plan investigative audit, along with the very real expenditures, both in time and money, associated with such audits.”

Windows’ Status Remains Murky

The CAR’s impact on the availability of and investments allowed in brokerage windows remains unclear. Three companies—Bitwage, Digital Asset Investment Management and ForUsAll—were offering in-plan cryptocurrency options as of the CAR’s release date, and all three continue to do so. Additionally, Fidelity Investments launched its in-plan Digital Assets Account in April 2022. Bitwage, DAIM and Fidelity include cryptocurrency options as a diversifier within a plan’s lineup; ForUsAll uses a brokerage window.

ForUsAll sued the DOL in June 2022 and requested that the CAR be “vacated and set aside.” Among other points, the company cited the CAR’s business impact, claiming that approximately one-third of plans that had been discussing the crypto option with ForUsAll had put their plans on hold pending regulatory clarification. In Congress, Senator Tommy Tuberville, R-Alabama, in February reintroduced legislation to prohibit DOL regulation limiting the investments available in a 401(k) plan’s brokerage window.

Difficulties With In-Plan Crypto

Schwab’s Self-Directed Brokerage Account Indicator for the quarter ending March 31 shows how Schwab’s recordkeeping retirement plan participants were invested through their plans’ brokerage windows. According to the report, equities accounted for 33% of holdings, followed by mutual funds (29%), exchange-traded funds (22%), cash and equivalents (11%) and fixed income (4.4%).

Plan sponsors can limit participants’ investment options available through the brokerage window. Alight Solutions’ 2021 recordkeeping data survey found that 60% of sponsors offering windows allowed full brokerage options, while 40% imposed limits (31% allowed only mutual funds, and 9% allowed only mutual funds and ETFs). ForUsAll caps participants’ brokerage window cryptocurrency investments at 5% of the initial portfolio value, plus 5% of ongoing contributions.

Even with allocation and contribution limits in place, plan fiduciaries face operational challenges with crypto investments. The CAR mentions direct crypto investments plus “other products whose value is tied to cryptocurrencies.” In response, the trade associations cited previously highlighted the lack of available mechanisms “for identifying and excluding cryptocurrencies from brokerage windows, let alone explicitly defining cryptocurrency investments that could be problematic.”

The associations argued this is particularly true for “products such as mutual funds and exchange traded funds that offer exposure to cryptocurrencies but are not direct investment in cryptocurrencies per se.” As these types of investments proliferate, they believe it will be more difficult for plan sponsors to “identify, evaluate, and exclude such investments from brokerage windows.”

Going Forward

Tim Rouse, executive director of the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute in Simsbury, Connecticut, believes that increasing fiduciary responsibility over brokerage widows due to the CAR would limit their benefit and take away a service that participants have come to value.

Despite the questions elicited by the CAR and the lack of clarity on what constitutes a crypto investment, neither Mason nor Rouse has seen any recent changes in plans’ use of brokerage windows. According to Vanguard, for example, at year-end 2022, 20% of the plans for which Vanguard serves as recordkeeper had a self-directed brokerage option. That result was unchanged from the previous year, before the DOL issued the CAR.

Several factors could explain the lack of immediate response to the CAR. First, the amount of assets in brokerage windows is small: just 1% of Vanguard plan participants’ assets at year-end for both 2021 and 2022, and other recordkeepers also report low-single-digit results.

Second, ForUsAll is the sole 401(k) provider to offer a dedicated cryptocurrency window. Plan participants with unrestricted windows at other recordkeepers could be investing in cryptocurrency via exchange-traded funds, for instance, but because there is no clearly defined asset class, recordkeepers cannot simply run a search to identify participants’ crypto holdings, Rouse notes.

A final factor could be the belief that the CAR does not align with past DOL guidance and the hope that it will be either modified or withdrawn. Per the trade associations’ letter: “At a minimum, it is critical that the [CAR’s] announcement of a new fiduciary standard with respect to brokerage windows be withdrawn.”