3793 / What is an eligible investment advice arrangement?

ERISA contains a general prohibition against providing services to a plan for a fee. It is a prohibited transaction unless exempted either in the law or by regulations. There is a statutory exemption for investment advice rendered by a fiduciary advisor under an “eligible investment advice arrangement.” These requirements are designed to allow the plan fiduciary to meet the obligations under ERISA in the hiring of an investment advisor.¹ The provisions discussed here generally are effective with respect to advice provided after December 31, 2006.

On October 25, 2011, the Employee Benefits Security Administration of the U.S. Department of Labor issued final regulations implementing a statutory exemption from ERISA’s prohibited transaction rules that allows fiduciary advisors to offer plan participants and beneficiaries investment advice for a fee under eligible investment advice arrangements.² The exemption, discussed below, was mandated by the Pension Protection Act of 2006 and is available for transactions occurring on or after December 27, 2011 that provide sufficient safeguards to ensure there is no conflict of interest.

The final rules do not affect the applicability of the DOL’s prior guidance on the application of the prohibited transaction rules and existing prohibited transaction exemptions to investment advice arrangements.

The Final Regulations

The statutory exemption allows fiduciary investment advisors to receive compensation from investment vehicles that they recommend if either (1) the investment advice is based on a computer model certified as unbiased which applies generally accepted investment theories, or (2) the advisor is compensated on a “level-fee” basis (i.e., fees do not vary based on investments selected by the participant). The final regulations provide detailed guidance to advisors on compliance with these conditions.

The regulations also show advisors how to comply with other conditions and safeguards in the statutory exemption, including:

• requiring that a plan fiduciary (independent of the investment advisor or its affiliates) authorize the advice arrangement;


• imposing recordkeeping requirements for investment advisors relying on the exemption;


• requiring that computer models be certified in advance as unbiased and meeting the exemption’s requirements by an independent expert;


• establishing qualifications and a selection process for the investment expert who must perform the above certification;


• clarifying that the level-fee requirement does not permit investment advisors (including their employees) to receive compensation from any party (including affiliates) that varies on the basis of the investments that participants select;


• establishing an annual audit of both computer model and level-fee advice arrangements, including the requirement that the auditor be independent from the investment advice provider;


• requiring disclosures by advisors to plan participants.³

Fee Disclosures

In February 2012, the DOL issued final regulations on fee disclosure⁴ and provided a Sample Guide to Initial Disclosures.⁵ In its final rule, the DOL extended the deadline for disclosures to July 1, 2012. In May 2012, the DOL issued a Field Assistance Bulletin providing guidance on frequently asked questions about participant-level disclosure requirements.⁶

See Q 3794 for information about establishing an eligible investment advice arrangement and Q 3795 for a detailed discussion of who is a fiduciary advisor for purposes of an eligible investment advice arrangement.