ADVISORIES: Brokerage Window Options for Defined Contribution Plans Flashcards
State and local governments should exercise extreme caution when considering whether to offer a brokerage window option in conjunction with a defined contribution retirement plan.
What is the purpose of the GFOA advisories?
To identify specific policies and procedures to minimize a government’s exposure to potential loss in connection with its financial management activities.
What is a brokerage window in the context of defined contribution plans?
A type of defined contribution plan that allows participants to select a much larger number of investments through a broker, enjoying the same tax advantages as a regular defined contribution plan.
What types of investments can participants potentially select through a brokerage window?
Depending on the plan, participants can invest in only mutual funds or in both mutual funds and individual securities.
What does GFOA recommend regarding the offer of a brokerage window option in defined contribution retirement plans?
GFOA recommends exercising extreme caution, ensuring careful review by the governing board, clear outlines in investment guidelines, and establishment of investment education and asset allocation information programs.
What considerations should be made regarding the range of investment instruments offered through a brokerage window?
Consideration of offering mutual funds only or a full range of investment instruments, requiring a minimum balance, and limiting the participant assets placed through the brokerage window.
What should plan sponsors require from participants using the brokerage window option?
A written acknowledgement from the participant understanding and accepting the risks, the potential for an undiversified portfolio’s unusual risk profile, and the sole responsibility for the suitability of selected investments, along with an agreement to hold the plan sponsor harmless.
What should the plan sponsor disclose to participants regarding the brokerage window option?
The basic fees for participating in the brokerage window, the potential for additional fees and transaction costs.
