On October 25, 2011 the DOL issued a final rule relating to the provision of investment advice to participants and beneficiaries in individual account plans and beneficiaries of individual retirement accounts (and certain similar plans). This ALERT will focus on employer sponsored individual account plans.
Background
The Pension Protection Act of 2006 created a statutory exemption from the prohibited transaction rules which permit participants and beneficiaries access to investment advice. Regulations were initially issued in 2008, withdrawn in 2009 and reissued as proposed in 2010. The final rule is effective December 27, 2011.
Why is it important?
In its Fact Sheet, the DOL estimates that there are approximately 134,000 defined contribution plans covering 17 million participants and beneficiaries and that 3.5 million of these participants and beneficiaries will seek investment advice. Without this final rule, it would have been a prohibited transaction for an investment advisor to provide advice if the investment advisor received additional fees related to the investments the advisor recommends. The final rule outlines the requirements for an exemption from the consequences of a prohibited transaction.
How can an investment advisor offer advice under the final rule?
There are two methods that an investment advisor can utilize to offer advice and be exempt from the prohibited transaction rules:
- Investment advice based on a computer model certified as unbiased and as applying generally accepted investment theories or
- The advisor is compensated on a “level-fee” basis, i.e., fees do not vary based on investments selected by the participant.
The final rule provides detailed guidance for advisors to comply with these advice delivery models including:
- Computer models must be certified in advance as unbiased
- An annual independent audit of the investment advice arrangements
- Disclosure of certain required information to the participant before the initial provision of advice (a model disclosure notice was provided)
- Consideration of participant information relating to age, time horizons, risk tolerance, current investments etc. in the provision of advice.
What is the role of the Plan Sponsor?
The investment advice arrangement must be expressly authorized by a plan fiduciary. Like any other plan fiduciary activity, the process for selecting the investment advisor should be documented and once selected, the investment arrangement monitored. The following are some key fiduciary requirements to add to your compliance calendar:
- The selection of an investment advice arrangement is a fiduciary act.
- The investment advice arrangement must be authorized by a plan fiduciary.
- The computer model must be certified by an eligible investment expert. The fiduciary adviser is responsible for selecting the eligible investment expert.
- Both the level fee and computer based investment arrangement must be audited annually by an auditor who is independent from the investment adviser. The fiduciary adviser is responsible for selecting the independent auditor.
- The plan fiduciary must receive a copy of the independent auditor’s report within 60 days of completion of the audit.
- The fiduciary adviser must provide certain required disclosures to participants.
You may want to check our new blog periodically for quick updates on compliance issues.
Note: all links are active as of the date of issuance of this ErisaALERT.
Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For more information on this ErisaALERT contact us by phone at 610-524-5351 and ask for Mary Andersen or 973-994-7539 and ask for Theresa Borzelli.
