Final Regulations Issued on Participant Investment Advice

Earlier today the Department of Labor issued final guidance on the provision of investment advice by a fiduciary advisor to participants and beneficiaries in participant-directed plans, such as 401(k) plans.  View the final regulations .  In general, such investment advice will be exempt from ERISA's prohibited transaction provisions, where such advice is provided by a "fiduciary advisor" under an "eligible investment advice arrangement" that is expressly authorized by a plan fiduciary.

A fiduciary advisor is defined as a registered investment advisor, bank or similar financial institution, insurance company or registered broker/dealer (or employee, agent or registered representative of each) who is a plan fiduciary by reason of providing investment advice to a participant.  An eligible investment advice arrangement is an arrangement that uses either fee-leveling, or a computer model, to generate investment advice.

Investment advice using the fee-leveling approach must be based on generally accepted investment theories that take into account, among other considerations:

• historic returns of different asset classes over defined periods of time;
• investment management and other fees and expenses attendant to the investment advice; and
• certain account and personal information provided by the plan and/or a participant (such as time horizon [age, life expectancy, retirement age], risk tolerance, other assets and sources of income, and investment preferences).

Under this approach the fees received by the fiduciary advisor (or its employees, agents or representatives) for the investment advice may not vary based upon investment advice or the.options selected by participants.

Arrangements utilizing a computer model must ensure the model is designed and operated to apply or account for:

• generally accepted investment theories;
• investment management and related fees;
• personal information, to the extent provided, from participants;
• objective criteria to provide asset allocation portfolios; and
• all designated investment options available under the plan, weighted equally.

A fiduciary advisor is required to obtain from an eligible investment expert (as defined under the regulations) written certification that the computer model satisfies the regulatory requirements. 

The regulations also require a fiduciary advisor to (1) engage an independent auditor, at least annually, to audit the investment advice arrangement, and within 60 days of the audit, issue a written report to the fiduciary advisor and each fiduciary authorizing use of the arrangement; and (2) provide certain written disclosures to the participants and beneficiaries, without charge (the rules contain a model disclosure form).

The final rules make it clear that nothing contained in the regulations imposes an obligation on a plan fiduciary to offer, provide or otherwise make available any investment advice to a participant.

For more information about the final regulations, please contact Rich Ciambrone, Melissa Proffitt Reese, or the Ice Miller LLP Employee Benefits attorney with whom you work.