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DOL Finalizes Regulations on Investment Advice to Plan Participants

    Client Alerts
  • October 28, 2011

Responding to the steady growth of participant-directed defined contribution plans, such as 40(k) plans, individual retirement account plans, and the need to afford participant and beneficiaries greater access to professional investment advice, the federal Department of Labor recently published final regulations implementing the statutory prohibited transaction exemption under ERISA and the tax code, allowing fiduciaries to provide investment advice to plan participants. The final rules are effective December 24, 2011.

Under the final regulations, advice to participants is permissible under an "eligible investment advice arrangement," which must be implemented using either fee leveling or a computer model. A fee-leveling arrangement provides investment advice based on generally accepted investment theories, taking into account information specific to the participant, and fees may not vary based on the investment option selected. An arrangement using a computer model may provide advice only designed and operated to apply generally accepted investment theories, taking into account investment management and other fees and expenses, and information specific to the participant. The investment advisor must obtain a written certification that the computer model meets these requirements.

Either option must be expressly authorized by a plan fiduciary and satisfy further safeguards. The arrangement must be audited annually for compliance with the requirements of the regulations. The plan must also provide participant disclosures, including an explanation of the type of arrangement that will be used. The regulations include a model notice for this purpose.

DOL hopes that this guidance will encourage plan providers to offer investment advice to plan participants and beneficiaries, who are often ill equipped to maneuver in presently tumultuous financial markets.