Obama Administration Issues Final Rule on Investment Advice

Bush-era rule replaced; regulation implements prohibited transaction exemption of pension law

By Stephen Miller, CEBS Oct 25, 2011

The U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) issued a new final rule on Oct. 24, 2011, intended to improve workers’ access to fiduciary investment advice. The rule, effective on Dec. 27, 2011, replaces a final rule issued in the last days of the Bush administration but pulled before it could take effect by the Obama administration's DOL. The new final rule was published in the Oct. 25, 2011, Federal Register.

The prohibited transaction rules in the Employee Retirement Income Security Act (ERISA) and the tax code generally prevent a fiduciary investment advisor from recommending plan investment options to plan participants if the advisor receives additional fees from investment providers. Although the prohibited transaction rules are meant to protect participants from conflicts of interest, ERISA provides exemptions in some circumstances and permits the DOL to grant additional exemptions that have participant-protective conditions.

Implementing the PPA

The new final rule implements an exemption that Congress enacted in 2006 as part of the Pension Protection Act (PPA) to improve participant access to fiduciary investment advice from plan service providers or their affiliates. To qualify for the exemption, the PPA requires of these "fiduciary advisers" that they ensure that one of the following occurs:

  • Level-fee basis. The adviser must charge a flat fee that does not vary depending on the investment choices that plan participants make, or
  • Unbiased computer model. Investment recommendations and asset allocations must be based on a computer model that is certified by an independent third party to be unbiased and objective.

Both types of arrangements must satisfy several other conditions, including the disclosure of the advisor’s fees and an annual audit of the arrangement for compliance with the regulation.

While the PPA grants limited liability protection regarding individual investment advice that meets the above criteria, employers are still required to select and manage their investment advice provider prudently.

The final rule acknowledges that the intent of the PPA is to not invalidate prior guidance of the DOL relating to investment advice, including the DOL's often cited SunAmerica opinion letterregarding the use of computer programs to select an appropriate asset allocation portfolio. Rather, "the legislation builds upon these advisory opinions and provides alternative means for providing investment advice which is protective of the interests of plan participants," according to the final rule.

“Given the rise in participation in 401(k)-type plans and IRAs, the retirement security of millions of America’s workers increasingly depends on their investment decisions,” said EBSA Assistant Secretary Phyllis C. Borzi. “This rule will make high-quality fiduciary investment advice more accessible, while providing important safeguards to minimize potential conflicts of interest.”

Tortuous History

The final rule implementing the PPA's exemption has a long and tortuous history. In September 2009, the Obama administration's DOL indicated its intention to revise a final investment advice rule issued by the departing Bush administration in January 2009 (see “Labor Department to Drop Bush Administration Investment Advice Rule”). In February 2010, the DOL issued its new proposed rule with the following clarifications, which remain in the new final rule:

  • 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 who is 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.

Adviser Compensation Clarified

The final rule states that the DOL intends for the fee-leveling requirement to be broadly applied in order to ensure the objectivity of investment advice recommendations. Specifically, the final rule requires that "no fiduciary adviser...that provides investment advice receives from any party (including an affiliate of the fiduciary adviser), directly or indirectly, any fee or other compensation (including commissions, salary, bonuses, awards, promotions or other things of value) that varies depending on the basis of a participant’s or beneficiary’s selection of a particular investment option."

The broad application of the proscription to include payments from affiliates was one of the differences between the Obama administration's rule and the Bush-era rule that it replaced.

Other Key Provisions

Under the final rule, any investment advice must:

  • ​Be based on generally accepted investment theories that take into account historic returns of different asset classes over defined periods of time, but generally accepted investment theories that take into account additional considerations are not precluded.
  • ​Take into account investment management and other fees and expenses for the recommended investments.
  • Take into consideration, to the extent furnished, information relating to age, time horizons, risk tolerance, current investments in designated investment options, other assets or sources of income, and investment preferences of the participant or beneficiary. The fiduciary adviser must request such information.

Upcoming: Revised Fiduciary Rule

The final investment advice rule is separate from and does not affect the DOL’s proposed rule to expand the definition of a retirement plan fiduciary to cover more broadly those who provide investment advice for a fee to an employee benefit plan or to plan participants—regardless of whether they provide advice on a regular basis, and whether or not the advice serves as the primary basis for investment decisions.

The DOL announced in September 2011 it intended to re-propose its fiduciary rule with revisions, following criticism that the proposed rule could stymie employer efforts to provide employees with education and advice about retirement plan investments. The revised proposed rule is expected in early 2012.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Resource:

DOL Fact Sheet: Final Rule to Increase Workers' Access to High Quality Investment Advice, U.S. Department of Labor, October 2011

Related Articles—SHRM:

DOL to Re-propose Controversial Fiduciary Rule, SHRM Online Benefits Discipline, September 2011

Assistant Secretary of Labor Highlights Upcoming DOL Regulations, SHRM Online Legal Issues, May 2011

DOL Issues New Proposed Rule on Investment Advice, SHRM Online Benefits Discipline, Feb. 26, 2010

Related Article—External:

Why So Many Unwisely Turn Down Free 401(k) Advice,Time, November 2011

Related Videos—SHRM Multimedia:

Embracing Investment Advice. Gary Kushner, president of Kushner & Co., explains the benefits of offering customized investment advice to employees.

Fiduciary Selection. Toni Pilzner, attorney at McDonald Hopkins LLC, says the Department of Labor's effort to expand the definition of a retirement plan fiduciary may increase HR's oversight responsibilities.

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Retirement Plans Resource Page

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