401(k) Plan Sponsors Can Provide (Unbiased) Investment Advice
The Department of Labor has published a final regulation that will make it easier for participants in a 401(k) program to get unbiased fiduciary investment advice. The ruling also gives employers a layer of litigation protection from plan participant investment results.
The decision implements an exemption that Congress enacted in the Pension Protection Act of 2006 (PPA), which prevented investment advisors from making recommendations that may be biased. To qualify, investment advice must meet several guidelines, but two stand out.
“The advice either needs to come from a computer model that is certified by an independent expert as unbiased, or from an advisor whose compensation is not tied to the investment decisions that a participant chooses,” says Anita Baker, principal-in-charge of LarsonAllen’s benefit services.
The final regulation gives providers more protection and plan participants more transparency, but organizations will need to determine if their existing arrangement qualifies under the new ruling, which will involve increased disclosure requirements than were required in the past.
The regulation is effective December 27, 2011, and will apply to transactions occurring on or after that date.
Background
With the growth of participant-directed plans, it has become even more imperative that participants receive investment advice. However, the
Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) generally prohibit a fiduciary from rendering investment advice to plan participants that result in the payment of additional advisory and other fees to the fiduciaries. (This regulation does not affect the Employee Benefit Security Administration’s [EBSA]
proposed rule on the “definition of a fiduciary,” which is currently defined as a person who renders investment advice for a fee or other compensation, direct or indirect, with respect to a plan, or has any authority or responsibility to do so.)
In response, Congress amended the prohibited transaction provisions of the ERISA and the IRC, as part of the PPA, to permit providers to offer a broader array of investment advice to participants and, in particular, on the adequacy of their retirement savings.
On October 25, 2011, the EBSA issued a final regulation on investment advice, which applies to all retirement plans that fall under ERISA, including some 403(b) plans. It also implements safeguards to prevent investment advisors from providing biased advice that is not in a participant’s best interest. To qualify for the exemption, the investment advice must be provided by a fiduciary advisor under an “eligible investment advice arrangement.”
Eligible investment advice arrangements
Two general types of arrangements are eligible. One is based on compliance with a “fee-leveling” requirement which limits the fees and compensation of the advisor. This means the advisor’s fees remain the same regardless of the investments the participant chooses.
The other provision is based on a computer model that is certified as unbiased by an independent expert. Both types of arrangements must also satisfy several other conditions, including the disclosure of the advisor’s fees and an annual audit of the agreement for compliance with the regulation.
How we can help
Plan sponsors will want to avoid being subject to the ERISA prohibited transaction
penalties. We can help plan sponsors determine if the fiduciary investment advice they provide will be an “eligible investment advice arrangement” and qualify for the prohibited transaction exemption under this regulation.
Additional information
Access the DOL’s fact sheet on the final ruling.
Anita Baker, Benefit Services
abaker@larsonallen.com or 480-615-2410
View our benefit services principals.