U.S. Department of Labor Issues Final Regulations Regarding Investment Advice to Participants U.S. Department of Labor Issues Final Regulations Regarding Investment Advice to Participants

U.S. Department of Labor Issues Final Regulations Regarding Investment Advice to Participants

On October 25, 2011, the U.S. Department of Labor, through its Employee Benefits Security Administration (EBSA), again issued final regulations (Final Regulations) regarding the provision of investment advice to participants and beneficiaries under individual account plans, such as 401(k) plans and individual retirement arrangements (IRAs).  The Final Regulations become effective on December 27, 2011.

The Final Regulations replace previous "final" regulations under the Pension Protection Act of 2006 (PPA) that were issued on January 21, 2009 and subsequently withdrawn on November 20, 2009.  The PPA provisions were enacted largely in response to the increased proliferation of individual account plans that allow for participant control over the investment of such accounts, along with the perceived demise of traditional defined benefit pension plans. This combination might be expected to have a substantial effect on the overall level of retirement savings available to an aging population.

Plan fiduciaries often must make difficult choices in the interests of educating participants in a beneficial way, without running afoul of ERISA's prohibited transaction rules (which are largely concerned about possible overreaching by fiduciaries, particularly when it comes to fees).  This week's release of the Final Regulations should, at a minimum, provide sponsors of individual account plans with some added certainty with respect to the level of investment advice that may be offered to participants and beneficiaries under these plans.

Notably, the prior class exemption that had accompanied the withdrawn 2009 final regulations and that would have expanded the statutory exemption has been removed from the Final Regulations.  Among other things, the new Final Regulations confirm that fees or compensation received by the fiduciary advisor (or its employees, agents or representatives) for the investment advice may not vary based upon the investment advice or the investment selections made by participants.  Also confirmed is that, for advice purposes, all designated investment options must be considered (the list now explicitly includes qualifying employer securities and asset allocation funds).

Like the previous withdrawn 2009 final regulations, the new Final Regulations provide that, in general, 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.

Fee Leveling Approach - 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 (for example, age, life expectancy, retirement age), risk tolerance, other assets and sources of income, and investment preferences].

Computer Model Approach - Arrangements utilizing a computer model must ensure, among other considerations, 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;
  • appropriately weighing factors used in estimating future returns; and
  • avoiding recommendations that inappropriately favor options offered by the fiduciary advisor or that generate greater income for the fiduciary advisor.

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 impose an obligation on a plan fiduciary to offer, provide or otherwise make available any investment advice to a participant.

View the full text of the final regulations.  For additional information, please contact Melissa Proffitt Reese, Craig C. Burke, or the Ice Miller LLP Employee Benefits Practice Group attorney with whom you work.


This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

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