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DOL Issues Proposed Guidance on Retirement Plan Investment Advice Arrangements

    Client Alerts
  • September 05, 2008

Much has been written in the press recently about workers not saving enough money for retirement because they either do not contribute enough to their retirement plans or are inexperienced at making investment decisions.  The Pension Protection Act of 2006 (“PPA”) made various changes to ERISA and the Internal Revenue Code intended to address the latter and make investment advice more accessible to participants in 401(k) and similar plans.  The PPA created an exemption from conflict of interest rules and potential fiduciary liabilities to encourage plan sponsors and investment advisers to offer investment advice to participants in retirement plans and owners of individual retirement accounts (IRAs).

The PPA exemption generally allows two types of investment advice arrangements, a level fee arrangement and a computer model arrangement.  The exemption was generally effective beginning in 2007 and plan sponsors currently can take advantage of level fee arrangements, though it appears that few such arrangements are yet available.  Computer model arrangements may prove popular, but more guidance has been needed from the U.S. Department of Labor (“DOL”) before they can be put into effect.  The DOL issued limited guidance relating to the exemption in a Field Assistance Bulletin (“FAB”) released in February 2007 (link here for EmployNews article on the FAB).  The DOL recently issued more guidance, including proposed regulations.

The proposed regulations generally expand on the PPA’s statutory language.  Regardless of whether a plan utilizes a level fee or computer model arrangement, the arrangement must meet various requirements, including:

  • authorization by a plan fiduciary (for IRAs, the IRA beneficiary) who is independent of the person offering the arrangement,
  • an annual independent audit of the plan’s or IRA’s fiduciary adviser,
  • clearly-written disclosures of information, including the adviser’s compensation, how a participant’s personal information will be used, the types of services being offered, computer model limitations (when used), and the fact that the adviser is acting as a plan fiduciary -- the  proposed regulations include a non-mandatory, model adviser fee disclosure form, and
  • other conditions including compliance with securities law disclosures and transaction terms at least as favorable as those in an arm’s length transaction.

While the requirements for level fee arrangements are fairly straight-forward, computer model arrangements must meet additional requirements, including application of accepted investment theories and consideration of all designated investment options.  Most importantly, fiduciary advisers using computer models must obtain a specific written certification of the model from an “eligible investment expert.”  The proposed regulations provide guidance on what must be included in a written certification and the qualifications of an eligible investment expert.  Once finalized, these regulations should provide a clearer path for investment advisers to establish these computer model arrangements for investment advice and for plan sponsors to take advantage of them.