The Department of Labor (DOL) recently announced two proposed rules under the Pension Protection Act (PPA) designed to make investment advice more accessible for millions of Americans in 401(k)-type plans and individual retirement accounts (IRAs). Comments on the proposals are due October 6.

The Pension Protection Act (PPA) amended the Employee Retirement Income Security Act (ERISA) by adding a new prohibited transaction exemption that allows greater flexibility for participants in 401(k) plans and IRAs to obtain investment advice, the DOL explains in its release announcing the proposals. One of the ways in which investment advice may be given under the exemption is through the use of a computer model certified as unbiased. The other is through an advisor compensated on a “level-fee” basis, meaning the advisor receives the same compensation regardless of the investment chosen by the participant. The advisor must also fully disclose any fees assessed.

The new proposals would require advisors and broker/dealers to be fiduciary advisors to IRAs, as they are with 401(k) plans, and clarifies the use of computer models. John Carl, president of the Retirement Learning Center, says the IRA is “one rung down from a true qualified ERISA plan, so you keep seeing this movement to have IRAs equal to a qualified Title 1 ERISA asset, which makes sense because most assets in the IRAs come from qualified plans.”

According to DOL, the proposed regulation provides general guidance on the exemption’s requirements, including computer model certification, and includes a non-mandatory model form that advisors may use to satisfy the exemption’s fee disclosure requirement. In addition, DOL says that “to further the availability of quality, professional investment advice, the department is proposing a class exemption that permits advisors to provide individualized advice to a worker after giving advice generated by use of a computer model.” In other words, the DOL has “lumped together the use of a computer model with an advisor,” says Carl.

The original PPA effectively outlined three exemptions that would give the plan sponsor fiduciary relief, Carl explains. First was auto enrollment in the qualified default investment alternative (QDIA), which means that for those participants who stay in that QDIA, “the DOL won’t recognize a lawsuit brought by them. So as a plan sponsor you can insulate yourself from a lot of fiduciary risk,” Carl says. The second exemption was to offer a fiduciary advisor in the plan. The third exemption, using a computer model, was outlined but not clarified.

This new DOL proposal recognizes that “many participants are not going to use a computer model by itself, so they created a fourth model called the off model advice, which is the hybrid of a computer model and an advisor,” Carl says. “If you as a plan sponsor or a B/D have looked at computer models, you can supplement this computer model with the off model–an advisor also giving advice on the phone or in person–and they will utilize that computer model or variation of it to give advice.”

This new hybrid model will prove most onerous for traditional broker/dealers, Carl argues, “because in order to do this off model advice program, you have to agree and admit that you are a fiduciary on these IRAs.” Firms like Merrill Lynch, he says, “refuse to even acknowledge that they’re fiduciaries in 401(k) plans.” If the proposal turns into law, “B/Ds would have to create advisory accounts on these IRAs and acknowledge their fiduciary duty. If they don’t, DOL is saying it would be considered a prohibited transaction. It’s huge. It would totally change the way most IRAs are administered.”


Washington Bureau Chief Melanie Waddell can be reached at mwaddell@investmentadvisor.com.