Provisions of the Pension Protection Act of 2006 do not invalidate
or otherwise affect prior guidance relating to investment advice, the
Labor Department said in Field Assistance Bulletin No. 2007-01,
released Feb. 2.
“Such guidance continues to represent the views of the
department,” the bulletin said.
According to the bulletin, such guidance includes:
• Interpretive
Bulletin 96-1 (23 BPR 1540, 6/17/96), in which the department
identified categories of investment-related information and materials
that do not constitute investment advice.
• Advisory
Opinion Nos. 97-15A (24 BPR 1269, 6/2/97) and 2005-10A (99 PBD,
5/24/05; 32 BPR 1277, 6/7/05), in which the department explained that
a fiduciary investment adviser could provide investment advice with
respect to investment funds that pay it or an affiliate additional
fees without engaging in a prohibited transaction, if those fees are
offset against fees that the plan otherwise is obligated to pay to the
fiduciary.
• Advisory
Opinion No. 2001-09A (238 PBD, 12/21/01; 29 BPR 8, 1/2/02) in which
the department concluded that the provision of fiduciary investment
advice would not result in prohibited transactions, where the advice
provided by the fiduciary with respect to investment funds that pay
additional fees to the fiduciary is the result of the application of
methodologies developed, maintained, and overseen by a party
independent of the fiduciary.
FAB 2007-01 clarified that the same fiduciary duties and
responsibilities apply to the selection and monitoring of an
investment adviser for participants and beneficiaries in a
participant-directed individual account plan, regardless of whether
the program of investment advice services is one to which the
statutory exemption applies.
The statutory exemption referred to is Section 408(g)(10) of the
Employee Retirement Income Security Act regarding exemptions from
prohibited transactions and provision of advice to plan participants
and beneficiaries.
The bulletin also clarified that when an individual acts as an
employee, agent, or registered representative on behalf of an entity
engaged to provide investment advice to a plan, that individual, as
well as the entity, must be treated as the fiduciary adviser for
purposes of Section 408(g)(11)(A). In such instances, therefore, both
the individual and the entity would be treated as fiduciary advisers
and subject to the limitations of Section 408(g)(2)(A)(i), it
said.
PPA Investment Advice Provisions.
Among other things, the PPASection 601 included a safe harbor for
employers to provide investment advice to help employees manage their
tax code Section 401(k) accounts (151 PBD, 8/8/06; 33 BPR 1899,
8/8/06).
The law created a prohibited transaction exemption for investment
advice that is tailored to a recipient and provided by a qualified
fiduciary adviser who is fully regulated by applicable banking,
insurance, and securities laws, through an “eligible investment
advice arrangement.”
Investment advice provided to a participant or beneficiary of an
employer-sponsored retirement plan through a computer model that is
certified by an independent eligible investment expert would qualify,
as long as the only investment advice provided under the program is
the advice generated by the computer model and the transaction occurs
solely at the direction of the participant or beneficiary.
Also, advice could be provided to employer-sponsored plans and
individual retirement accounts by a qualified fiduciary adviser who
charges a flat rate fee without regard to the investments
selected.
Selection and Monitoring.
“Plan fiduciaries have a duty to prudently select and
periodically monitor the advisory program,” the bulletin
said.
The bulletin clarified that a plan sponsor or other fiduciary will
not fail to meet the requirements of Part 4 of title I of ERISA solely
by reason of offering a program of investment advice services to
participants or beneficiaries that is not an eligible investment
advice arrangement.
It further clarified that a plan sponsor or other fiduciary that
prudently selects and monitors an investment advice provider will not
be liable for the advice furnished by such provider to the plan's
participants and beneficiaries, whether or not that advice is provided
pursuant to the statutory exemption under Section 408(b)(14).
Also, like fiduciaries offering exempted advice arrangements,
fiduciaries offering programs of investment advice services with
respect to which exemptive relief is not required have no duty to
monitor the specific investment advice given by the investment advice
provider to any particular recipient of the advice, the bulletin
said.
A fiduciary should engage in an objective process that is designed
to elicit information necessary to assess the provider's
qualifications, quality of services offered, and reasonableness of
fees charged for the service, the bulletin said. The process also must
avoid self- dealing, conflicts of interest, or other improper
influence, it said.
In monitoring investment advisers, it is anticipated that
fiduciaries will periodically review, among other things, the extent
to which there have been any changes in the information that served as
the basis for the initial selection of the investment adviser,
including whether the adviser continues to meet applicable federal and
state securities law requirements, and whether the advice being
furnished to participants and beneficiaries was based upon generally
accepted investment theories, the bulletin said.
Finally, plan assets can be used to pay reasonable expenses in
providing investment advice to participants and beneficiaries,
provided the service provider rendering investment advice is selected
and monitored prudently, the bulletin
said.
Eligible Investment Advice Arrangement.
An eligible investment advice arrangement includes an arrangement
that provides that any fees, including any commission or other
compensation, received by the fiduciary adviser for investment advice
or with respect to the sale, holding, or acquisition of any security
or other property for purposes of investment of plan assets, do not
vary depending on the basis of any investment option selected, the
bulletin said.
The term “fiduciary adviser” is defined as a person who
is a fiduciary of the plan by reason of providing investment advice
and who is a registered investment adviser, a bank or similar
financial institution, an insurance company, or a registered broker
dealer; an affiliate of such registered investment adviser, bank,
insurance company, or broker dealer; or an employee, agent, or
registered representative of any such entity, the bulletin said.
It also said that in the PPA, Congress did not intend for the
requirement that fees not vary depending on the basis of any
investment options selected to extend to affiliates of the fiduciary
adviser, unless, of course, the affiliate is also a provider of
investment advice to a plan.
Parties offering investment advisory services are expected to
maintain, and be able to demonstrate compliance with policies and
procedures designed to ensure that fees and compensation paid to
fiduciary advisers, at both the entity and individual level, do not
vary on the basis of any investment option selected, the bulletin
said. Moreover, it is anticipated that compliance with such policies
and procedures will be reviewed as part of the required annual audit,
it said.
By Michael W. Wyand
A copy of the bulletin is available at
http://www.dol.gov/ebsa/pdf/fab2007-1.pdf.