PWBA Office of Regulations and Interpretations

Blue Line

December 12, 2001

Mr. Stephen M. Saxon
Groom Law Group
1701 Pennsylvania Avenue, N.W.
Washington, D.C. 20006-5893

Dear Mr. Saxon:

This is in response to your request on behalf of Charles Schwab & Co., Inc. (Schwab), regarding the annual reporting requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you asked that guidance be issued allowing plans to report investments made through participant-directed brokerage accounts as part of a single line item on the Schedule H of the Annual Return/Report Form 5500 rather than by type of asset on the appropriate line item for the asset category, e.g., common stocks, mutual funds, employer securities

According to your submission, participant-directed brokerage accounts are becoming an increasingly popular investment option offered by defined contribution pension plans. The accounts tend to be used as an investment option in 401(k) plans. The accounts, commonly referred to as "brokerage windows," allow participants the opportunity to purchase stocks, bonds, mutual funds or other investments that are not offered as part of the plan's main investment alternatives. The brokerage account provider typically performs recordkeeping for assets in the accounts. You represent that grouping individual investments in the accounts into the Form 5500 asset categories (common stocks, mutual funds, employer securities, etc.) creates a substantial administrative burden. In fact, you indicate that this categorization generally must be done manually rather than as part of an automated recordkeeping function. A similarly cumbersome manual process must be completed to report income earned on the accounts in the appropriate Form 5500 categories. You expressed concern that the administrative burdens and costs associated with the Form 5500 annual reporting requirements will deter plan sponsors from offering brokerage accounts as an option under their plans.

After a careful review of the issues raised by your request, the Department of Labor, in coordination with the Internal Revenue Service and the Pension Benefit Guaranty Corporation, has decided to modify the instructions to the 2001 Annual Return/Report Form 5500 to recognize alternative methods by which individual account plan assets invested by participants through brokerage windows may be reported. In this regard, the instructions to the Schedule H (Financial Information) will contain the following instruction relating to brokerage windows:

For the 2001 plan year, plans that provide participant-directed brokerage accounts as an investment alternative (and have entered pension feature code "2R" on line 8a of the Form 5500) may report investments in assets made through participant-directed brokerage accounts either:

  1. As individual investments on the applicable asset and liability categories in Part I and the income and expense categories in Part II, or

  2. By including on line 1c(15) the total aggregate value of the assets and on line 2c the total aggregate investment income (loss) before expenses, provided the assets are not loans, partnership or joint-venture interests, real property, employer securities, or investments that could result in a loss in excess of the account balance of the participant or beneficiary who directed the transaction. Expenses charged to the accounts must be reported on the applicable expense line items.

The instruction will further explain that participant-directed brokerage account assets reported in the aggregate on line 1c(15) should be treated as one asset held for investment for purposes of the Schedule H, line 4i schedules, except that investments in tangible personal property must continue to be reported as separate assets on the line 4i schedules. This Schedule H reporting option generally mirrors the asset categories that smaller plans must break out for all of their investments on Schedule I, lines 3a through 3g. Large plans with participant-directed brokerage accounts thus would be subject to asset break out requirements for the accounts similar to those now applicable to small plans with such accounts.

The Department notes that the Agencies will be conducting a review of the foregoing method of reporting for plans with brokerage windows in an effort to determine whether and under what circumstances such method of reporting may need to be modified to ensure adequate information is provided to plan sponsors, participants and beneficiaries, and the Agencies in the future.

The Department further notes that, while the alternative method of reporting permits aggregate reporting of certain assets, the provided alternative in no way relieves fiduciaries of individual account plans with brokerage windows from their obligation to prudently select and monitor designated plan investment options and brokers.


John J. Canary
Chief, Division of Coverage, Reporting & Disclosure
Office of Regulations and Interpretations

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