Spring 2010
DOL Proposed Regulations on Participant Investment Advice: Final Closure is Near
There’s still time to comment
On March 2, 2010, the Department of Labor Employee Benefits Security Administration (EBSA) published proposed regulations under the Employee Retirement Income Security Act (ERISA), "relating to the provision of investment advice to participants and beneficiaries in individual account plans, such as 401(k) plans, and beneficiaries of individual retirement accounts (and certain similar plans)." 1
These regulations are designed to offer guidance to plan sponsors and advisors who wish to offer their plan participants assistance in making plan investment choices when the guidance would otherwise be a prohibited transaction.
The proposed regulations define the type of advice allowed under an exemption to the statute and replace guidance contained in a final rule, published in the Federal Register on January 21, 2009, that was withdrawn in part due to comments the DOL received. According to Investment News, April 4, 2010, "The department and other observers were concerned that the proposed rule did not adequately protect investors from advisers who recommend funds that most benefit their own personal income statements, not necessarily those that are most appropriate for plan participants." 2
Computer models and fee-leveling arrangements
The most recent proposed regulations, issued March 2, 2010, would allow an advisor to provide advice to a retirement plan or participant on investments that generate additional income for the advisor under either of two conditions: advice must be offered in accordance with a fee-leveling agreement or be based on a third-party-provided computer-based model.
Fee-leveling agreements are those in which the compensation which the investment advisor receives does not vary based on the investments selected by the participant. The proposed regulations contain clarifying language that applies to both fee-leveling agreements and computer models (with minor variations) including the following requirements:
- Investment advice must be based on generally accepted investment theories that take into account the historic risks and returns of different asset classes over defined periods of time.
- Investment advice must take into account investment management and other fees and expenses attached to the recommended investments.
- Investment advice (or advisor) must take into account, to the extent furnished by a plan, participant or beneficiary, information relating to age, time horizons (e.g., life expectancy, retirement age), risk tolerance, current investments in designated investment options, other assets or sources of income, and investment preferences of the participant or beneficiary. A fiduciary advisor may request and take into account additional information that a plan or participant may provide.
- No fiduciary advisor (including any employee, agent, or registered representative) that provides investment advice may receive from any party (including an affiliate of the fiduciary advisor), directly or indirectly, any fee or other compensation (including commissions, salary, bonuses, awards, promotions, or other things of value) that is based in whole or in part on a participant's selection of an investment option.
The proposed regulations also go into great detail in an attempt to define and clarify what constitutes an eligible computer model. However, many questions remain about how the EBSA will ultimately define “generally accepted investment theories” and appropriate computer models.
Comment on DOL questions by May 5, 2010
The DOL has invited comments on the conditions applicable to investment advice arrangements that use computer models, including responses to these questions:
- "What investment theories are generally accepted and what investment practices are consistent or inconsistent with such theories?"
- "Should this regulation specify such theories and require their application?"
- "Should the regulation dictate the bases for model parameters such as the probability distribution of future returns to assets classes or particular investments?"
- "What historical data should be taken into account in determining a model's expectation for future performance of asset classes and specific investment alternatives?"
- "How, if at all, should a model take into account investment management style? For example, all else being equal, should a model ascribe different levels of risk to passively and actively managed investment options?" 1
Investment News noted that some of the DOL’s questions "appear to suggest that the Labor Department might require the models to include only index funds in their options…There is also the issue of whether the Labor Department should be endorsing constrained models (i.e., those limited to index funds)." 2
Financial planners and investment advisors have approximately one more week to express their expert opinions. Instructions for submitting your comments on or before May 5, 2010 are contained on page one of the Federal Register.
Learn more: participate in our webinar with Fred Reish
How the DOL's proposed participant advice rule affects you, your clients and their employees
May 13, 12 p.m. ET, Presenter: Fred Reish of the law firm Reish & Reicher
Be sure to catch our special webinar on this topic. Fred Reish will discuss the impact of the rule and opportunities for helping participants invest prudently both under and outside of the regulation, while avoiding prohibited transactions. Contact The Standard’s retirement plan experts to discuss how these changes will impact your business and your clients.