`Brokerage Links’ Should Fit Broad 401(k) Goals

It's a vocal minority of plan participants that tends to want more options within their 401(k) plans.
Ask the ExpertsMarch 6, 2001

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Q: I am the CFO of a corporation of 2,000 employees. Our current 401(k) plan provides a wide variety of investment options and a generous match in company stock. Presently, 63 percent of our employees are enrolled in our plan, which has $40 million in total assets. Our benefits manager has expressed interest in including a “brokerage link” to the list of options already in the plan. What are the pros and cons of brokerage links?
Wlliam S. Higgins

A:One of the newest options in the ever-expanding world of 401 (k) plans is the brokerage link, also known as “brokerage windows” or “mutual fund windows.” This option offers more investment opportunities, a change some investors welcome. Before signing up for a brokerage link, you need to advise your participants about how this strategy could affect their retirement savings and the additional costs of time and money they are likely to incur.

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To be sure, it’s a vocal minority of plan participants that tends to want more options within their 401(k) plans. In concept, however, brokerage links make a tremendous amount of sense if they include a large mix of mutual funds from a variety of fund families.

They can enable your employees to further diversify their portfolios, thereby reducing their overall risk. On the other hand, without a thorough knowledge of the principles of diversification, your employees may use a brokerage link to invest in more risky securities.

Brokerage links necessitate significant work by the participant. Participants must spend time educating themselves on what is available to them through the link—something that has minimal interest to the average 401(k) participant. Currently, participants spend very little time doing research on their own, no matter what amount of education the plan sponsor provides.

Then there are the additional fees that the plan and participants will incur. There will be some increase in total plan administration expenses for a benefit that will be used by a minority of participants. In addition, a fee is assessed to participants who choose to use the service. Add this to the trading fees that are accrued, and many participants will likely not use the benefit.

Brokerage links can serve a legitimate purpose. But before you decide to use them, understand whether you are doing it for a vocal few or for the benefit of all participants. Education on the inherent risks associated with participation in such a service is imperative.

–J. Michael Scarborough, president and CEO, The Scarborough Group Inc., an Annapolis, Md., 401(k) consultancy. For more information on 401(k) management, tune in to “401(k) Today with The Scarborough Group” on WBIS AM 1190 in Baltimore, 4P.M. to 5 P.M. on Wednesdays and 6 7 P.M. on Tuesdays starting April 3, or listen to the show on