Brokerage Windows and 404(c)

[Guest CRC02]

I am trying to ascertain if a 401(k) plan with a brokerage window meets the requirements of 404©. I am struggling with how a brokerage window could meet the requirement of 29 CFR 2550.404c-1(B)(2), which requires that a participant or beneficiary give investment instructions to an identified plan fiduciary. It would seem that in most situations, the broker to whom the participant would give instructions is not a fiduciary of the Plan as the broker doesn't exercise any discretion, they just carry out participant instructions. But if this interpretation is correct, how do regular self-directed accounts meet this requirement (i.e. when employees select and change investments online through direct communication with an investment firm)? Any thoughts?

[mbozek]

There are three ways to answer the queston:

1. channel all instructions through the plan fid which is impractical as well as administratively burdensome to the fid.

2. make the broker an agent of the fid so that the trades are deemed made to the fid. However, the brokers are not willing to be subject to fid liability under ERISA because they execute trades since this liability does not exist in non ERISA accounts.

3. Have the broker copy the Fid on all trades by the participant on the grounds that is a reasonable opportunity to give investment instructons to a fid.

The problem is that the DOL regs were written before electronic trading and phone switching became a reality in the investment world. Also the DOL requirement of providing instructions through the fid is in conflcit with the SEC policy that all trades must be settled in three business days. The only way the rule makes sense is if the trading instructions from the participant are routed through the fid who then sends the instructions to the broker without reviewing the trades. I would like to know how the above rule is complied with in plans that permit electronic switching of mutual fund accounts in 401(k) Plans.