DOL Issues New Proposed Investment Advice Regulations

On February 26, the Division of Employee Benefits Security Administration (EBSA) of the U. S. Department of Labor (DOL) issued new proposed rules on employer-provided investment advice to participants and beneficiaries of self-directed retirement plans such as 401(k) plans. DOL/EBSA has requested comments from interested parties by May 5, 2010.

Click here for a copy of the proposed regulations.

Proposed Regulations:
The new proposed regulations (RIN 1210-AB35, 29 CFR 2550) replace the “final” rules briefly promulgated in January 2009 that were withdrawn by DOL later in 2009. The proposed regulations specify that the new proposed rules are “nearly identical to the withdrawn January 2009 final rule that implements the statutory exemption” to prohibited transaction rules related to the provision of investment advice.

The statutory exemption was adopted in the Pension Protection Act adopted by Congress in 2006. The most significant change from the withdrawn regulations and the new proposed regulations is the absence of a class exemption in the new proposed rules. DOL stated it withdrew the class exemption because it determined that the class exemption’s conditions “are not adequate to mitigate advisers’ conflicts.”

The Class Exemption:
The now-withdrawn class exemption would have extended the statutory exemption rules to cover situations where plan participants are given individualized investment advice following receipt of recommendations generated by a compliant computer model, so long as the computer model advice did not recommend investment options that would generate greater income for the adviser. The class exemption also would have broadened the investment advice statutory exemption in the case of a level fee arrangement by making it sufficient that fees paid to the adviser would not vary based on the investments chosen by the plan participants. But the now-defunct class exemption would have allowed variations in fees paid to the company represented by the adviser—generally the company offering the investment choices.

Complying with the Prohibited Transaction Exemptions:
Generally, the new proposed rules (which parallel the rules contained in the now-withdrawn final rule from January 2009) require that for employer-provided investment advice to comply with the prohibited transaction exemption provided in the Pension Protection Act, the following requirements must be met:

• The advisor cannot receive any payment, in whole or in part, from any party that is based on the investments selected by the plan’s participants or beneficiaries.
• The investment advice arrangement must be expressly authorized by a plan fiduciary (other than the investment adviser).
• Under the fee-leveling arrangement, the advice given:
• Must be based on generally accepted investment theories that take into account historic risks and returns of different classes of assets over defined periods of time
• Must include disclosure and explanation of investment management and other fees and expenses attendant to the recommended investments
• Must take into account such factors as the participant’s/beneficiary’s age, time horizon (e.g., life expectancy, retirement date), risk tolerance, current investments, other assets and sources of income, and the investment preferences of the participant/beneficiary. The adviser must request this information, but may proceed with advice even if the participant/beneficiary declines to provide some or all of it.
• The adviser may receive no fee or any other form of compensation based on the participant/beneficiary’s selection of a specific investment.
• Generally, the computer model arrangement will qualify under the statutory exemption if it is based on generally accepted investment theories, taking into account generally accepted investment theories, historic risk and return data of different investments over defined periods of time, and investment management and other fees and expenses attendant to the recommended investments.

Notice and Audit Requirements:
Investment advisers must also comply with annual notice and audit requirements, and must provide, at no charge, information regarding the adviser’s fees and relationships with others involved in the selection and management of the participant/beneficiary’s investment choices. The adviser must also make plan participants/beneficiaries aware that other sources of investment advice are available.

Model Disclosure Form:
The new proposed rules contain non-mandatory model disclosure forms that advisers can use to comply with the rules’ disclosure requirements

Comments Requested:
The proposed new rules request comments on specific issues. They include whether the proposed effective date (60 days after publication in the Federal Register) should be changed, and questions about the appropriate data to require to be included in a computer model.

NAIFA Staff Contact: Michael Kerley, Senior Vice President – Federal Government Relations, at (703) 770-8155.