Advisory

On February 26, 2010, the Department of Labor (DOL) released new proposed regulations under the Employee Retirement Income Security Act (ERISA) relating to the provision of investment advice to participants and beneficiaries of participant-directed individual account plans such as 401(k) plans and IRAs. The new proposed regulations replace the final regulations that were issued in January, 2009, but then deferred and finally withdrawn in November in response to commenters' concerns that the administrative class exemption in the regulations might not adequately mitigate potential self-dealing by investment advisors. The DOL has addressed these concerns by excluding the class exemption from the new proposed regulations.

Aside from the removal of the class exemption, some clarifications on the “level-fee” requirements described below, and a new condition relating to computer models, the new proposed regulations are substantially the same as the withdrawn final regulations. When finalized, the proposed regulations will implement the prohibited-transaction exemption for the provision of investment advice in ERISA sections 408(b)(14) and 408(g) that was enacted under the Pension Protection Act of 2006 (PPA).¹

Background
Absent an exemption, ERISA’s and the Code’s prohibited-transaction rules bar a fiduciary from rendering investment advice to plan participants on investments that result in additional fees to plan fiduciaries or their affiliates. The PPA added a new statutory exemption from the prohibited-transaction rules covering the provision of investment advice. Subject to certain safeguards and conditions, the new exemption was intended to expand the availability of investment advice to participants in 401(k) plans, IRAs and similar individual account plans that permit participants to direct the investment of their plan accounts.

On January 21, 2009, the DOL published final regulations implementing the statutory exemption for investment advice added by the PPA. The final regulations also contained an administrative class exemption expanding the prohibited-transaction relief to certain circumstances not covered by the statutory exemption. For example, the class exemption would have permitted individualized follow-up advice to participants who previously received generalized computer-generated advice or IRA participants who received investment education materials (“off-model advice”). More important to institutional advisers, the class exemption would have provided relief at the fiduciary-advisor-entity level, so long as the individual employee, agent, or registered representative providing the advice met the level fee requirements, even if the entity would receive varying fees based on participants’ investment elections (“modified fee leveling”).

The effective date of the 2009 final regulations was originally March 23, 2009, but, at the request of new administration, the DOL delayed the effective date of the regulation and reopened the notice and comment period. The DOL determined that the issues raised by the commenters, particularly with respect to the modified fee leveling, were indeed sufficient to cast doubt on the whether the class exemption’s conditions were adequate to mitigate the potential for investment advisor self-dealing. Based on such determination, the DOL withdrew the 2009 final regulations on November 20, 2009.

1. The PPA also added parallel provisions to sections 4975(d)(17) and 4975(f)(8) of the Internal Revenue Code of 1986, as amended (Code). Any references contained herein to sections 408(b)(14) and 408(g) of ERISA include corresponding references to sections 4975(d)(17) and 4975(f)(8) of the Code.

For a copy of this publication, please click the link in the adjacent "Download" section.