3794 / How is an eligible investment advice arrangement established?

An eligible investment advice arrangement may be established in either of two ways: (1) the arrangement may provide that any fees (including commissions or other compensation) received by the fiduciary 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, or (2) the arrangement may use a computer model that meets specified criteria, described below, in connection with the provision of investment advice by a fiduciary advisor to a participant or beneficiary.¹

The use of either method requires the plan fiduciary to comply with the statutory requirements of this exemption. Those requirements include:

(1)  that the advisor must act as an independent fiduciary;

(2)  proper authorization to provide the services;

(3)  compliance with an audit requirement;

(4)  disclosure of all relevant information including meeting certain standards for presentation of information;

(5)  the maintenance of proper records; and

(6)  that the fees charged the plan are reasonable.²

The fee leveling requirement is met if the fees, commissions, or any revenue sharing by the advisor do not vary based upon the recommendations provided. This applies to the affiliate of the advisor.³

Computer Model

The computer model must:

(1)  apply generally accepted investment theories that take into account the historic returns of different asset classes over defined periods of time;

(2)  use relevant information about the participant, such as age, life expectancy, retirement age, risk tolerance, other assets or sources of income, and preferences as to certain types of investments;

(3)  use prescribed objective criteria to provide asset allocation portfolios comprised of investment options offered under the plan;

(4)  operate in a manner that is not biased toward investments offered by the fiduciary advisor, or a person in material affiliation or contractual relationship with the fiduciary advisor; and

(5)  take into account all investment options under the plan in specifying how a participant's account should be invested and not be inappropriately weighted with respect to any investment option.⁴

The person who develops or markets the computer model or investment advice program may be treated as a fiduciary advisor under certain circumstances.⁵

The utilization of the computer model must be certified by an "eligible investment expert" as meeting the foregoing criteria, and the only advice provided under the arrangement can be that generated by the computer model and any transaction requested by the participant.⁶ The arrangement also must be audited annually and must meet detailed written disclosure requirements. Records of compliance must be maintained for six years.⁷

An eligible investment advice arrangement must be expressly authorized by a plan fiduciary other than the person offering the investment advice. Notifications required for participants and beneficiaries must be written in a clear and conspicuous manner, calculated to be understood by the average plan participant.⁸ The DOL is directed to issue a model form for this purpose.⁹