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Sponsors Give Brokerage Windows High Marks

While conceding that only a small minority of 401(k) plan participants uses brokerage windows, employers who offer them in their plans give them high marks.

"It's been one of the more successful of the new investment options we've introduced," says Vernon Gollihugh, Director of Trust Investments for ALCOA Inc. ALCOA added a brokerage window to its retirement savings plan in 1989. Although it has captured only about 1% of plan assets, Gollihugh says it has been well received by those who use it, the majority of whom are salaried employees. With a brokerage window, participants in a retirement savings plan can invest in a nearly limitless array of securities, including individual stocks and almost any mutual fund available to retail investors.

Some retirement plan specialists worry that brokerage windows can make it too easy for plan participants to swap between Stable Value funds and competing fixed-income investments when interest rates are volatile. This would potentially strain the liquidity of Stable Value Funds when rates rise quickly. Gollihugh says his plan has seen no evidence of that happening. In fact, he says, ALCOA has not even found it necessary to impose an equity wash rule on plan participants to discourage such arbitrage. Equity wash rules, a common feature in many defined contribution plans, require that transfers out of Stable Value be directed to an equity fund option for a stated period of time before that money can be invested in a fund that competes with Stable Value, such as a money market fund.

Though pleased with its brokerage window investment option, ALCOA has tried to head off abuse of the feature, or its unintentional poor use, by making it relatively cumbersome for participants to sign up to use it. It takes about two weeks to open a brokerage window account in ALCOA's plan, during which time the participant must take several steps to move the process forward. Also, the brokerage window does not show up on plan statements as an investment option along with the other investment options in the plan, Gollihugh says. However, ALCOA does not charge participants to use the brokerage window.

William Petrovic, Vice President and Treasurer of Roche Diagnostics Corp., says his company added a brokerage window to its 401(k) plan about a year and a half ago after acquiring another company that had it for its employees. With the brokerage window now accounting for less than 0.2% of contributions to the plan, he says, it has presented no problems for the plan or its Stable Value fund. Even though Roche does impose an equity wash rule on its plan participants, Petrovic says it has not been a contentious issue. Nor has it caused any extra work for Roche, since participants who might be impacted by the rule must deal with the plan's record keeper, Fidelity Investments, when they move money from one investment option to another. Petrovic adds that unlike ALCOA, Roche Diagnostics passes along to plan participants any fees levied by Fidelity for using the brokerage window in its plan.

Brokerage windows are still not ubiquitous in 401(k) plans, although they aren't rare, either. Speaking at the SVIA forum, Chris Tobe, a Director with the Pension and Savings Group at AEGON Institutional Markets, cites a recent survey by Northern Trust Retirement Consulting which found that fewer than one in four companies offers a brokerage window to their plan participants. Of participants who have access to a brokerage window, he adds, 40% do not use it at all and only 9% use it a lot.

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