DOL Issues New Proposed Rule on Investment Advice

By Stephen Miller Feb 26, 2010

At a White House forum on Feb. 26, 2010, the U.S. Department of Labor (DOL) announced its long-awaited revised proposed rule on investment advice for American workers covered by 401(k) plans and other retirement arrangements.

At the same time, the DOL announced publication of a final rule to increase the transparency of multiemployer pension plans; see DOL Issues Final Rule on Multiemployer Pension Plans.

"These rules will strengthen America's private retirement system by ensuring workers get good, objective information. When that happens, workers make the kind of decisions that are good for their families and the nation as the whole," said U.S. Deputy Secretary of Labor Seth Harris at the forum.

Not everyone agrees. “We are disappointed the Department of Labor decided to move in this direction after having withdrawn the previous final regulations and class exemption," commented Elizabeth Varley, managing director, government affairs, at the Securities Industry and Financial Markets Association, in a released statement. “The proposed regulation, if approved, will do little to expand American’s access to investment advice. Americans are seeking the best paths to saving and investing for their retirement and deserve rules that allow them to do so. Today’s move by Labor will hurt participants and investors, not help.”

The proposed investment advice rule, Investment Advice—Participants and Beneficiaries, seeks to ensure that workers receive unbiased advice about how to invest in defined contribution 401(k)-type plans. The rule reaffirms that third-party independent advice programs allowed under the DOL's SunAmerica opinion letter remain valid.

What the rule, if adopted, would change, in a nutshell:

A plan fiduciary must authorize the advice arrangement including selection and monitoring of the arrangement.

Computer models used to offer advice must be certified as objective and unbiased by a plan fiduciary independent of the investment advisor or its affiliates.

To satisfy the fee-leveling requirements, entities providing investment advice and their employees may not receive compensation from any party, including any affiliate of the advisor, on the basis of their recommendations.

An annual audit of investment advice arrangements must be made by an independent auditor.

Some fear that applying the prohibition on incentive compensation "up the chain" will make it less likely that affiliates of financial firms that act as 401(k) plan administrators would provide low-cost investment advice to participants, and would instead favor independent firms that provide investment advice at a higher cost, should plan sponsors agree to engage their services.

The DOL has posted a fact sheet on the proposed rule.

Old Rule Out, New Rule In

In November 2009, the Department of Labor withdrew a January 2009 Bush administration final rule implementing sections of the Pension Protection Act (PPA) that modified the Employee Retirement Income Security Act (ERISA) to allow, under certain conditions, defined contribution plan participants to receive advice from financial firms that act as plan service providers. (See DOL Scuttles Bush Administration InvestmentAdvice Rule.)

Similar to the withdrawn final rule, the new proposed rule permits investment advice to be given under the PPA's statutory exemption from liability (that is, employers that allow outsiders to provide investment advice to plan participants can be protected from liability in the event the investments don’t perform well), but only if the advice is provided in one of two ways:

Through the use of a computer model certified as unbiased.

Through an advisor compensated on a "level-fee" basis (i.e., fees do not vary based on investments selected by the participant).

The proposed rule includes several requirements pertaining to these methods. Among these, it:

Requires that a plan fiduciary (independent of the investment advisor or its affiliates) select the computer model or fee-leveling investment advice arrangement.

Imposes recordkeeping requirements for investment advisors relying on the exemption for computer model or fee-leveling advice arrangements.

Requires that computer models be certified in advance by an independent expert as being unbiased and meeting the exemption’s requirements.

Establishes qualifications and a selection process for the investment expert who must perform the above certification.

Clarifies that the fee-leveling requirements do not permit investment advisors (including their employees) to receive compensation from affiliates on the basis of their recommendations.

Establishes an annual audit of investment advice arrangements, including the requirement that the auditor be independent from the investment advice provider.

Requires disclosures by advisors to plan participants.

Favoring Index Funds?

Regarding computer models that may be used to provide investment advice, the proposed rule requires stricter limits on how th​ey may operate. For example, it would bar recommendations that distinguish "inappropriately" among investment options within a single asset class.

The proposed rule states:

While some differences between investment options within a single asset class, such as differences in fees and expenses or management style, are likely to persist in the future and therefore to constitute appropriate criteria for asset allocation, other differences, such as differences in historical performance, are less likely to persist and therefore less likely to constitute appropriate criteria for asset allocation.

Allowing computer models to take into consideration different fees among funds within the same asset class, but not past performance among these funds would, some observers say, favor passively managed index funds. Index funds generally have lower fees than actively managed funds, whereas actively managed funds often point to their past performance in promotional materials.

In addition, the proposed rule states that computer models must avoid recommendations that inappropriately favor investment options offered by the advisor, or that may generate income for the advisor or those with a material affiliation or material contractual relationship with the advisor.

Written comments on the investment advice proposal can be submitted by e-mail to or through the federal e-rulemaking portal at The comments deadline is May 5, 2010.

Stephen Miller is an online editor/manager for SHRM.​

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