Copyright 2009 Institute of Management & AdministrationAll Rights Reserved Managing 401(K) Plans

March 2009

HUMAN RESOURCES Vol. 2009 No. 3

1264 words


Rep. Miller Vows to Block Investment Advice Final Rule

On January 16, the Labor Department released its final rule on investment advice that fiduciaries give to 401(k) plan participants and beneficiaries, and Rep. George Miller (D-Calif.), chairman of the Education and Labor Committee, asserted his determination to block the rule.

"As we transition to a new administration, we will use every tool at our disposal to block implementation of this harmful regulation," Miller said, expressing concern that it could undermine retirement savings plans for millions of Americans.

"It will allow financial services firms to offer potentially conflicted investment advice on workers' retirement accounts," Miller said.

"We are disappointed that the Bush administration moved forward to enact a new regulation that will make it harder for workers to receive fair and honest advice when making key financial decisions about their futures," Miller said.

However, House Republican leader John Boehner (R-Ohio) said Republicans will "vigorously oppose any scheme that would take away workers' ability to determine the best course for their own retirement security."

Final Rule

The final rule is on investment advice by a fiduciary adviser to participants and beneficiaries in participant-directed individual accounts plans, such as a 401(k) plan and individual retirement account.

The final rule includes an exemption to the prohibited transaction provisions of the Employee Retirement Income Security Act (ERISA), as well as a class exemption. The final rule retains the general requirements and substance of the proposed rule, with a number of clarifying changes made in response to suggestions from commenters, the department said.

The final rule provides guidance on exemption requirements, including computer model certification, and encompasses a nonmandatory model form that advisers could use to satisfy the statutory exemption's fee-disclosure requirement.

The class exemption, incorporated into the final rule, permits advisers to provide individualized counsel to a worker after giving guidance generated by use of a computer model.

To be exempt from the prohibited transaction requirements of ERISA, the final rule requires the investment advice to be provided by a fiduciary adviser under an eligible investment advice arrangement (EIAA).

An EIAA is an arrangement that meets either the requirements of the investment advice arrangements that use flat fees, known as fee-leveling, or investment advice arrangements that use computer modeling, or both.

The department said that, notwithstanding the availability of the final rule, plans or plan sponsors are under no obligation to provide investment guidance.

See News Briefs item on page 8, "Final Fee Disclosure Rules Stopped by White House, Further Review Ordered."

Sole Relief Described

The requirements and conditions of the final rule apply solely to the relief described in it, and no inferences should be drawn with respect to the requirements applicable to the provision of investment advice not addressed in it, the department said.

The department also said the final rule includes safeguards against the risk of conflicted fiduciary advice by assessing "potentially significant excise taxes" for noncompliance and patterns and practice of noncompliance.

The department retained the exception for computer modeling for IRAs because of the number of investments available under an IRA. Computer modeling will be an evolving, rather than static, standard, it said.

As computer modeling of investment advice develops, the department anticipates that the feasibility of developing models to take into account a wider variety of investment choices will also change.

The department projected 16.1 million burden hours with an equivalent cost of approximately $1.41 billion and a cost burden of approximately $642.6 million in the first year.

The department said it was uncertain how repercussions from changing financial markets and the market for financial products and services would affect the availability of investment advice to 401(k) plans and IRA beneficiaries.

Clarifications and Modifications

In the final rule, the department made some clarifications and modifications to the proposed rule. These included:

Arrangements that utilize fee-leveling must take into account investment management and other fees and expenses associated with recommended investments.

Similar to the selection of an eligible investment expert to certify a computer model, the selection of the required auditor is a fiduciary act.

The disclosure of all fees or other compensation that a fiduciary adviser receives in connection with any rollover or other distribution of plan assets or the investment of distributed assets is required.

Prior regulations, exemptions, and interpretive or other department guidance related to investment advice are not invalidated or otherwise affected.

Relief available under Section 404(c) to plan sponsors or other fiduciaries of the plan, with the exception of the fiduciary advisers, is unaffected by the final rule.

Otherwise permissible transactions necessary for the efficient execution and settlement of trades of securities, such as extensions of credit in connection with settlements, associated with investment advice, are covered.

Participant or beneficiary information is only required to be taken into account to the extent that it is actually provided. There is no obligation for a fiduciary adviser to factor in personal information that it does not have or that the participant or beneficiary fails or refuses to provide.

Whether any particular salary, bonus, award, promotion, or commission program meets or fails the fee-leveling requirement ultimately depends on the details of the program that will be subject to review by an independent auditor.

A computer model would not fail to meet the requirements of the rule because it limits buy recommendations only to those investment options that can be bought through the plan or IRA, provided the plan or IRA is fully informed of such limitations.

Absent a specific request from the participant or beneficiary to exclude qualifying employer securities from the modeled investment advice, it must be taken into account for purposes of computer modeling.

A plan sponsor fiduciary would not be treated as the person providing a designated investment option under the plan with respect to an option that is designed to invest in qualifying employer securities.

To the extent participants continue to have an ability to further invest in legacy options, options from predecessor plans, they must be included in the computer model.

An investment fund, product, service designed to maintain a particular asset allocation, taking into account the time horizons (retirement age, life expectancy) and risk level of a participant, and an annuitized retirement benefit are not required to be included in the computer-modeled investment advice. However, participants and beneficiaries should be provided a general description of these options and how they operate.

A fiduciary adviser is permitted to provide advice to its own employees, provided the fiduciary adviser or affiliate offers the same arrangement to participants and beneficiaries of unaffiliated plans.

Participants must be afforded advance notice of at least 30 days of the fiduciary adviser's intended investments.

The 10 percent revenue test, applied for purposes of determining whether persons have a "material contractual relationship" under the final rule, has deleted the word "written" regarding amounts paid pursuant to contracts or arrangements that have been reduced to writing.

March 6, 2009

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