On Feb. 2, 2007, the U.S. Department of Labor (“DOL”) issued Field Assistance Bulletin 2007-01 to address inquiries it had received concerning the scope of the new statutory exemption for participant investment advice, as enacted by the Pension Protection Act of 2006, and the effect of the exemption on the status of its prior guidance on “investment advice” under ERISA. The bulletin covers three issues—the effect of the exemption on prior DOL guidance, the standards for selecting and monitoring an investment advice provider (both under the exemption and under pre-existing law), and the scope of the “level fee” condition under the exemption.
Status of Prior DOL Guidance
The enactment of the new statutory exemption does not invalidate or otherwise affect prior DOL guidance concerning investment advice, but merely provides a new exemption for certain advice arrangements from the prohibited transaction rules. DOL mentioned in particular Interpretive Bulletin 96-1, on categories of investmentrelated information and materials that constitute “investment education” rather than “investment advice”; Advisory Opinions 97-15A and 2005-10A, which permit a fiduciary investment adviser that receives fees from plan investments to avoid a prohibited transaction by offsetting those fees against the fees the plan is otherwise obligated to pay; and Advisory Opinion 2001-09A (the SunAmerica letter), which describes an arrangement for providing advice using independent parties that would not result in a prohibited transaction.
This position reflects the legislative history under the Pension Protection Act. Standards for Selecting and Monitoring a Fiduciary Adviser DOL said that, as a general matter, the same fiduciary responsibilities apply in selecting and monitoring an investment adviser regardless of coverage under the new exemption.
The exemption contains a special provision providing that a plan fiduciary shall not be treated as failing to meet its fiduciary responsibilities solely by reason of arranging for investment advice under the exemption, but that it remains subject to the duty to select and review the advice-provider prudently. The exemption language further clarifies that fiduciaries have no duty to monitor the specific investment advice given by the fiduciary adviser to any particular recipient of advice. Analogizing these principles with those described in its interpretive bulletin on investment education, DOL said that a plan sponsor or other fiduciary that prudently selects and monitors an investment-advice provider will not be liable for the advice furnished by such provider to the plan’s participants and beneficiaries, and has no duty to monitor the specific investment advice given by the investment- advice provider to any particular recipient of the advice, regardless of whether the advice is provided pursuant to the statutory exemption.
DOL elaborated on what conduct would be necessary to meet this prudence obligation. To act prudently in selection, a fiduciary should engage in an objective process that is designed to elicit information necessary to assess the provider’s qualifications, quality of services offered, and reasonableness of fees charged for the service. The process also must avoid self dealing, conflicts of interest or other improper influence. The responsible fiduciary should therefore take into account the experience and qualifications of the investment adviser, including the adviser’s registration in accordance with applicable federal and/or state securities law; the willingness of the adviser to assume fiduciary status and responsibility under ERISA with respect to the advice provided to participants; and the extent to which advice to be furnished to participants and beneficiaries will be based upon “generally accepted investment theories.”
In monitoring investment advisers, DOL suggested that fiduciaries periodically review, among other things, the extent to which there have been any changes in the information that served as the basis for the initial selection of the investment adviser. Fiduciaries also should take into account: whether the investment-advice provider is complying with the contractual provisions of the engagement; utilization of the investment advice services by the participants in relation to the cost of the services to the plan; and participant comments and complaints about the quality of the furnished advice. DOL noted that, to the extent complaints raise questions concerning the quality of advice being provided to participants, a fiduciary may have to review the specific advice at issue with the investment adviser.
Furthermore, whether or not the advice program comes under the exemption, plan assets can be used to pay reasonable expenses in providing investment advice to participants and beneficiaries.
This guidance provides a helpful overview and clarification of the specific steps that fiduciaries should take to prudently select and monitor advice providers.
Scope of Level Fee Requirement Under the Exemption
One of the alternatives for complying with the new exemption is for the advice arrangement to provide that any fees (including any commission or other compensation) received by the fiduciary adviser for investment advice, or with respect to the sale, holding, or acquisition of any security or other property available under the plan pursuant to the investment advice, do not vary depending on the basis of any investment option selected. There have been questions about how broadly the “level fee” condition should be applied to meet this requirement. DOL said it is clear from the statutory language that only the fees or other compensation of the “fiduciary adviser” may not vary, in contrast to other subparts of the exemption that refer to the “fiduciary adviser or an affiliate.” As a person can be a “fiduciary adviser,” as defined in the exemption, only if the person is a fiduciary of the plan by virtue of providing investment advice, DOL concluded that an affiliate of the fiduciary adviser will be subject to the varying fee limitation only if that affiliate is itself providing investment advice. After all, DOL noted, if fees and compensation received by an affiliate of a fiduciary adviser do not vary or are offset, there would not be any prohibited transaction that requires an exemption.
Since the exemption permits employees, agents and registered representatives to qualify as fiduciary advisers, such individuals, as well as the entities they work for, must be treated as the fiduciary adviser for purposes of this provision, and therefore also must be subject to the level fee requirement. This means, according to DOL, that the fees or other compensation—including salary, bonuses, awards, promotions or any other thing of value—received, directly or indirectly, from an employer, affiliate or other party, by a fiduciary adviser, or used for the adviser’s benefit, may not be based, in whole or in part, on the investment options selected by participants or beneficiaries.
In this regard, DOL noted the general rule that a party seeking to avail itself of a statutory or administrative exemption from the prohibited transaction provisions bears the burden of establishing compliance with the conditions of the exemption. Therefore, DOL expects that parties offering investment advisory services under the exemption will maintain, and be able to demonstrate compliance with, policies and procedures designed to ensure that fees and compensation paid to fiduciary advisers, at both the entity and individual level, do not vary on the basis of any investment option selected. DOL further expects that compliance with such policies and procedures will be reviewed as part of the annual audit required by the exemption and addressed in the compliance report.
This guidance resolves an important question under the new exemption. It may require firms to restructure their operations or compensation structure to assure that the level fee condition can be met.