The Department of Labor’s Employee Benefits Security Administration (“EBSA”) recently issued final investment advice regulations (pdf) that are intended to make fiduciary investment advice more accessible for Americans who participate in 401(k)s and/or individual retirement arrangements (IRAs). When it comes to employer-sponsored plans, this new rule provides employers with the option of providing plan participants with access to investment advisors who may be current purveyors of the employer plan’s investment options.
Generally, the Employee Retirement Income Security Act’s (ERISA) “prohibited transactions” rules prohibit fiduciary investment advisers from receiving compensation from the investment vehicles that they recommend to plan participants and IRA holders. The final investment advice regulations, however, establish parameters for plan investment advisors to follow when advising participants and beneficiaries about defined contribution plans or IRAs so as not to run afoul of ERISA’s prohibited transaction rules.
Under the regulations, plan investment advisers are plan fiduciaries and, as such, must follow strict rules relating to how they can be compensated in connection with investments they recommend. The law permits them to be compensated through the investment vehicles they recommend without violating ERISA’s prohibited transaction rules if either: (1) the investment advice they provide is based on an unbiased computer model, or (2) the adviser is compensated on a "level-fee" basis (i.e., the fees do not vary based on investments selected by the participant). The final regulations provide detailed guidance to advisers on compliance with these conditions.
The final regulations also direct advisers on how to comply with other requirements and safeguards related to their investment advice including:
- Requiring a plan fiduciary, independent of the investment adviser or its affiliates, to authorize the advice arrangement.
- Imposing recordkeeping requirements on investment advisers relying on the exemption.
- Requiring that computer models be certified in advance as unbiased and meeting the exemption’s requirements by an independent expert.
- Establishing qualifications and a selection process for the investment expert who must perform the above certification.
- Clarifying that the level-fee requirement does not permit investment advisers (including their employees) to receive compensation from any party (including affiliates) that vary on the basis of the investments participants select.
- Establishing an annual audit of both computer model and level-fee advice arrangements, including the requirement that the auditor be independent from the investment advice provider.
- Requiring disclosures by advisers to plan participants.
The final rule clarifies that it does not affect the applicability of the DOL’s prior guidance on the application of the prohibited transaction rules and existing prohibited transaction exemptions to investment advice arrangements. This guidance includes that provided in Advisory Opinion Nos. 2011-08A, 2005-10A (Country Trust Bank), 2001-09A (SunAmerica Retirement Markets) and 1997-15A (Frost National Bank). Additionally, according to the EBSA, the final investment advice regulations are separate from, and do not affect, the fiduciary definition rule that is expected to be re-proposed in early 2012.
The final investment advice regulations take effect on December 27, 2011.