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Regulation and Compliance > Federal Regulation > DOL

Finally, Some Good News from the DOL

By Warren S. Hersch

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Thanks to a new rule debuted by the Department of Labor last month, employers will gain new flexibility in offering fiduciary investment advice to participants in their 401(k) retirement plans. The rule is a welcome addition to regulations governing employer-sponsored qualified retirement plans—but it’s been a long time coming.

Posted in the Federal Register and due to go into effect on Dec. 27, the new DOL rule is an outgrowth of the Pension Protection Act of 2006. The PPA amends the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code to provide an exemption to what was, until now, a prohibited transaction: the providing of an investment advice via an employer’s 401(k) plan service provider.

The rule extends to plan participants the services of advisors who, under the old regime, would be in violation of ERISA’s fiduciary rules respecting of conflicts of interest because of the advisor’s pre-existing relation with the service provider. Until now, businesses could only avail employees of such advice via independent advisors.

The ERISA exemption will thus afford 401(k) plan participants greater access to investment advice of financial professionals subject to the fiduciary standard of care under ERISA. And, said Assistant Secretary Labor and Director of the Employment Benefits Security Administration Phyllis Borzi, who spoke to reporters during press teleconference on October 24, the rule will also expand the number of businesses willing to offer investment advice as a part of a 401(k) for their employees. Many companies, Borzi noted, have been reluctant to do so—even via independent advisors—because they would be assuming a fiduciary duty to the plan participants.

While offering employers greater flexibility, the PPA exemption also preserves safeguards and conditions of ERISA’s prohibited transaction rules preventing investment advisors from providing advice that is biased or otherwise not in the plan’s participant’s best interest. To qualify for the exemption, Borzi said, investment advisors have to meet either of two conditions: (1) be compensated on a “level fee basis” (i.e., fees cannot vary with the selected investments); or (2) base recommendations on a computer model certified by an independent expert.

The new rule mandates other restrictions, including the disclosure of the adviser’s fee, plus an annual audit of the arrangement to assure compliance with the regulation.

Those who seek to skirt the rule’s requirements can expect a “self-executing” penalty. If an advisor is in violation of the rule—say because he or she is inappropriately favoring actively managed over passively managed funds—then an IRS excise tax will apply automatically.

The new PPA exemption, in sum, strikes me as a well crafted and balanced framework for delivering investment advisory services to 401(k) plan participants. At a time of rising economic uncertainty and instability in the equity markets, its release is also timely.

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