Ask the Expert: Should I offer PCRAs in my employees' 401(k) plan?

Can you discuss the pros and cons of Personal Choice Retirement Accounts (PCRAs) in a 401(k) plan? I’m a small-business owner with 15 participants in our current 401(k) plan. Our advisers are saying it’s a no-brainer to add a self-directed PCRA, giving participants the freedom to select among thousands of investments.

This decision isn’t a no-brainer.

A PCRA is often called a brokerage window — a self-directed 401(k) brokerage account with access to virtually unlimited investment choices (for additional transaction fees). Brokerage windows are currently available to an estimated 40% of the nation’s 401(k) participants, mostly in very big plans, but only about 1% of the participants with access to a window actually use it.

The account’s upside: It may increase a sophisticated investor’s potential returns. The downside: Few employees are sophisticated investors. Those who make bad decisions may sustain significant losses. (Any brokerage account must be available to all participants because by law, a 401(k) must be nondiscriminatory.)

A PCRA also presents a potential legal challenge for employers.

Last year, after Fidelity Investments made bitcoin available in 401(k) brokerage accounts, the U.S. Department of Labor issued a statement reminding employers of their fiduciary responsibility to choose prudent 401(k) investments and strongly suggesting that cryptocurrency doesn’t meet that standard.

Industry legal experts took the statement as a warning that employers’ fiduciary duty includes monitoring the risks inside PCRAs. An employer could restrict the investments available in the account, for example, or limit the percentage of participant savings that can be invested there.

The bottom line

A brokerage window increases a 401(k) plan’s investment risk and cost. It may (or may not) deliver higher returns for plan participants who use it wisely.

More information

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