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Brokerage 'windows' grow
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June 14, 2000: 5:56 a.m. ET
401(k) option gives you more flexibility, but also risk and expense
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - If you're feeling shackled by your 401(k) choices and want to put your tax-deferred contributions to better use, some companies now offer employees a way to step out into the wider investment world without actually leaving the plan.
The option, known as a "brokerage window" or "SDA" for self-directed account, lets 401(k) participants invest in nearly every fund and stock offered by the broker your company chooses.
"You can buy almost anything," said mutual fund analyst Bill Dougherty of Kanon Bloch Carre. "When your employer gives you the window, he's doing a good job. It offers more diversification."
Once the province of lawyers, doctors and other professionals in small firms, brokerage windows are growing in number, though they can hardly be called prevalent.
 Less than 20 percent of 401(k)s offer them, and most are in large-company plans. What's more, less than 5 percent of all 401(k) assets are tied up in such accounts, the majority of which belong to people with big salaries and large balances.
But the trend is toward choice and an SDA may be coming soon to a 401(k) near you. "This will be a common feature of plans over the next few years," said David Wray, president of the Profit Sharing/401(k) Council.
Freedom ain't free
But as much as experts may applaud offering employees more flexibility in their retirement investments, they do so with certain caveats.
With an SDA, you take full responsibility for your choices. That is not to say you don't shoulder a lot of the responsibility for your investments within a traditional 401(k) as well. You still have to make smart choices for your portfolio based on the selections your employer offers, with the understanding that your company in most instances is not accountable if a fund performs poorly in a given period.
But your firm is charged with offering you a selection of funds that are well-managed and considered responsible investment options. And it must regularly review those options using several criteria. That oversight is lacking when you choose securities through a brokerage window.
What that means is that you need to do much more research on your own in an SDA, or pay a financial adviser to help, said analyst Frank Stanton of fund-tracker Morningstar.
 "It's for sophisticated investors. ... Unless you're good, it's very dangerous to go too far from the offerings you have," Dougherty said. "You're taking more risk."
Fees are another potential downside. "This is not necessarily an inexpensive proposition," Wray said.
Maintaining a brokerage account in a 401(k) may cost you as much as $100 a year. And that's in addition to commission charges you will pay for every transaction. Loads, normally waived on funds within a plan, may also be added to your bill.
Fiduciary duty debated
Since brokerage windows, while not new, are just beginning to hit the 401(k) mainstream, there is little consensus and little precedent about the nature of the employer's fiduciary duty with SDAs.
"It's still a gray area," Stanton said.
That's primarily because there has yet to be a legal case to test the regulatory waters.
"Employers have to be careful," said certified financial planner Charles Schilleci, noting that firms are concerned about what role they need to take if, for instance, an employee invests in a manner the employer considers imprudent -- say, putting all your 401(k) money in Internet IPOs. "They don't want to have to get into that."
 But Wray contends that under the Employee Retirement Income Security Act of 1974 (ERISA), the law took account of the brokerage option, and indicates that "if employees direct the money, employers are not responsible for how they direct the money," he said.
That doesn't mean, however, employers can wash their hands of their fiduciary responsibilities. Just as with a traditional plan, they have a duty to find a reputable service provider with reasonable fees and sound record-keeping.
"If they choose XYZ Boiler Room, the employer is on the hook," Wray said.
Expect some limits
One thing companies are doing to protect themselves is to get written acknowledgement from their employees that they understand they have full responsibility for their investments in the brokerage window.
They're also limiting just how much of your money can be used in an SDA -- for instance, 25 percent of your total portfolio, including employer matches -- or requiring minimum balances in order to open an account.
"Companies are experimenting," Wray said.
While some employees may balk at the restrictions, the truth is the 401(k) is still a benefit, not a right, and the employer has absolute control over a plan's structure.
If you want one
If you're interested in lobbying your company for a brokerage window, you should put your request in writing and send it to the in-house office that helps administer the plan, such as the benefits department.
Making the change may not be simple or low cost for your employer, Wray said. Adding an SDA option means restructuring the 401(k), which involves legal fees, changing all 401(k) materials, and possibly renegotiating the contract with the service provider, such as Fidelity. That's because the change means the fund company may have fewer assets under management from the plan if more participants go through a brokerage.
But as companies seek to offer competitive benefits packages -- especially to upper management -- Wray said a brokerage window coupled with an otherwise structured plan of offerings may be a good compromise, since 401(k)s have to appeal both to participants who are savvy investors and those who are not.
"I think that you want to have a program that meets the needs and desires of all the employees," he said. 
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