Pressure is mounting on the U.S. Labor Department to back off its guidance against cryptocurrency investing because its implication for future brokerage window regulations has already imperiled one class action settlement.
The potential consequences of the anti-crypto guidance, issued by the department last month, have already prompted global money manager
The windows, which give workers access to the broader investment market through tax-advantaged retirement plans, are becoming a routine concession as plan sponsors fend off a rising tide of excessive fee lawsuits, such as the one resolved by T. Rowe. But companies could be less willing to settle on those grounds if the Labor Department tightens its regulatory controls on them.
“If the DOL were to require fiduciary oversight of individual investment options offered through brokerage windows, the monitoring obligations associated with maintaining such an offering in the plan would become materially more burdensome and costly than they were at the time the settlement agreement was entered,” T. Rowe Price attorney Brian Boyle wrote in a Maryland federal court filing on Monday.
T. Rowe Price has been finalizing the details of its accord with a class of workers that sued in 2017, alleging that the company filled its 401(k) with expensive, in-house funds. The brokerage window option in the plan would “allow Plan participants, for the first time, to invest in a wide range of non-T. Rowe Price investment funds,” according to the proposed settlement filed in the U.S. District Court for the District of Maryland.
But the $18 million value the company agreed to in that deal doesn’t take into account the added costs the Labor Department’s new brokerage window interpretation could add to the company, said Boyle, an attorney with O’Melveny & Myers LLP.
The department’s warning—that plan sponsors could face investigative action even if their participants access crypto investments through brokerage windows—has the benefits industry fearful that regulators are setting a new monitoring standard. Never before have plan sponsors been required to monitor brokerage window assets.
Plaintiffs in the case have said the window “has the potential to be the most valuable feature of the Settlement for Plan participants.” But the tentative accord allows T. Rowe Price to remove the feature if “there has been a change in law or regulation” regarding monitoring requirements,” Boyle wrote. The firm does not yet believe plan sponsors have a duty to monitor brokerage window investments, but the court should consider the DOL’s guidance as it considers the settlement value, he added.
Boyle didn’t respond to phone calls or emails seeking additional comment. T. Rowe Price representatives declined to comment. Lead counsel for the plaintiffs, James Moore of McTigue Law LLP, also declined to comment on the firm’s missive or his clients’ response.
‘Appealing Deal, Until Now’
T. Rowe Price isn’t alone.
“The idea that you’re wresting control away from an employer and giving participants freedom to invest broadly can be an appealing deal, until now,” said Phil Koehler, senior counsel at Hall Benefits Law LLC.
Guidance the department issued in March has since been met with fierce resistance from plan sponsors and industry groups representing record-keeping and money management firms. Brokerage windows are near the top of their list of complaints.
The crypto guidance says employers “allowing such investments through brokerage windows” could be investigated. Those companies “should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks” cryptocurrency poses, the guidance states.
Plan sponsors have historically understood that they have little or no responsibility to monitor the thousands of potential investments participants can access through a brokerage window.
“There can be thousands of individual investments within a brokerage window; how can a plan sponsor be expected to monitor all of them?” said Lynn Dudley, senior vice president for global retirement and compensation policy at the American Benefits Council.
Invest in Whatever
Brokerage windows often serve as pawns in excessive fees suits, as a defense against allegations that investment options are too narrow or as proof that plan sponsors are offering too many.
Six colleges and universities were targeted by a suite of lawsuits in 2016 claiming that the hundreds of options under brokerage windows those employers offered in their plans led to “decision paralysis” among investors.
But in cases where employers have offered too few indistinguishable investments, brokerage windows can appease participants wanting more options to diversify their portfolios.
“Adding a window allows participants to better control the investment universe in some way in their plans on a going-forward basis that didn’t exist prior to the litigation,” said Jorge Leon, a partner at Michael Best & Friedrich LLP in Chicago.
Windows giving participants access to more of Wall Street allow employers to offer up a non-monetary element in a costly suit and may be a last resort when plaintiffs’ allegations have arguably gone too far.
“They’re opening the universe as wide as they possibly can and letting the participants invest in anything they want within the window,” said Koehler of Hall Benefits Law. “In a way, they’re throwing their hands up in the air and saying ‘a pox on everyone; go ahead and invest in whatever you want.’”
Labor Department Responds
The Labor Department contends that its cybersecurity guidance doesn’t deviate from its longstanding position on brokerage windows.
It’s important that the benefits community not misconstrue what the intent behind the guidance was, said Ali Khawar, acting assistant secretary for the Employee Benefits Security Administration.
The guidance wasn’t written to find a “backdoor way to regulate brokerage windows in a whole new way,” Khawar said. In subregulatory guidance issued in 2012, the department specifically said that plan sponsor’s duty of prudence and loyalty to participants doesn’t end just by choosing to offer brokerage windows.
That approach hasn’t changed, Khawar said.
“The guidance does not say and was not intended to say that what you now have to do is, if you have a thousand options available in a brokerage window, you need to go and review every one of them and make sure that you would personally invest in them as a fiduciary,” he said.