The GameStop headlines coupled with ongoing news about cryptocurrencies make it seem as though there has been an explosion in amateur day traders in the past few years. Considered within the context of retirement plan investing, however, this is not the case.
A new analysis of Empower Retirement data reveals that very few people take advantage of their plan’s self-directed brokerage window,1 and even fewer are day trading within their plan.
In fact, as of December 2020, among the 40% of participants who had access to brokerage accounts in their defined contribution plans, only 1.5% were using the brokerage window. This figure represents a slight increase of 0.3% from December 2019, when approximately 1.2% of participants with access to a brokerage account used the feature. Among participants using brokerage windows, the average allocation was approximately half the total plan balance.
While there has been a small increase in brokerage window usage among participants in defined contribution plans at Empower, the overall number of participants using this feature remains very small. Still, plan sponsors need to be aware of how utilization of the service has changed (and is changing).
In light of these results, plan sponsors might consider the following options:
- Assess whether to offer a brokerage window. Once a plan offers a brokerage window, the feature can be difficult to remove. As a result, plan sponsors worried about participants actively trading their 401(k) savings who don’t currently offer a brokerage window may want to carefully consider the pros and cons of making the feature available.
- Limit how much of a participant’s balance can be allocated to the brokerage window. Doing so puts an automatic governance mechanism on a participant’s ability to trade their 401(k) balances.
- Evaluate brokerage window offerings. Plan sponsors with brokerage windows should evaluate whether to give participants access to individual securities or simply provide mutual funds.
- Engage ERISA counsel to evaluate the fiduciary risk of offering brokerage accounts. ERISA Section 404(c) relieves plan sponsors and other fiduciaries from liability for losses that result from participant direction of investments. To comply with 404(c), plan sponsors must meet a variety of requirements related to plan design and disclosures. Qualified counsel can review a plan’s compliance with these requirements and suggest any needed changes.
- Monitor brokerage window usage. Over time, plan sponsors should track brokerage window data, including the number of participants using this feature and the percentage of assets they are allocating. If trends are concerning, consider developing a targeted communications campaign to educate participants about their exposures.
For more about the characteristics of participants who use brokerage accounts, as well as the portion of plan assets that are allocated to them, download the white paper.