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Brokerage Windows: Get the Full View

Several brokerage providers eliminated commission fees on stock, ETF, and other trades recently, a move that highlights a “race to zero” within the brokerage industry.

(Estimated reading time: 1 min 33 sec)

Background: Brokerage firms have historically charged commission fees on various types of trades. The amounts charged, however, have generally declined over the past few years as smaller robo-firms have entered the market with either no fees or those significantly below the industry norm.

While the elimination of commission fees certainly affects retail investors, it also has important implications for participants within defined contribution (DC) plans that offer a brokerage window.

As DC plan sponsors have sought to provide additional choice and diversification opportunities to participants, brokerage windows have become more commonplace in large DC plans, according to data from the Callan DC Index™. As of June 30, 2019, approximately 42% of DC plans within the Index offered a brokerage window, an increase of 9 percentage points from five years ago.

Despite growing prevalence, the percentage of assets allocated to brokerage windows has not increased as rapidly. In 2014, the share of assets allocated to brokerage windows among all plans in the DC Index was approximately 2.3%. Today, that figure is 2.5%.

Bottom Line: Plan sponsors offering a brokerage window should be aware of how any changes by their provider may affect participants. Importantly, the elimination of commission fees does not apply to all types of trades. Standard fees will still apply to mutual fund trades, call center-supported trades, and many international exchange stock trades.

Those offering a brokerage window from a provider that has slashed fees may need to amend service agreements to reflect the change, review updated 408(b)(2) disclosures, and distribute an announcement to inform participants.

Additionally, plan sponsors with a provider that has not made changes should monitor developments and be prepared to take similar actions should a change occur.