Mutual fund firms and others looking to give advice to 401(k) participants or IRA investors now have two possible ways of doing so. Today the Department of Labor (DoL) will publish its finalized prohibited transaction exemption regulation that gives providers working with a 401(k) or IRA ways of offering advice [see the full reg or the fact sheet].

Phyllis Borzi, Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA), officially unveiled the finalized reg Monday, five years after Congress used the Pension Protection Act to call on the DoL to create this reg. To find out more about the new reg and the process and debate leading up to it, read our sister publication, The 401kWire [see The 401kWire, 10/24/2011].

The new reg takes effect on December 27, and gives prospective providers of 401(k) or IRA advice two options to avoid running afoul of the prohibited transaction rules under the Employee Retirement Income Security Act of 1974 (ERISA). On the one hand, the advice-provider (and their company) can provide advice on a level fee basis, regardless of what investments they recommend. On the other, the provider can instead use an unbiased computer model, certified by a third-party expert, to generate the appropriate recommendations. Given that different mutual funds from the same family often charge different fees, fund firms interested in the new exemption will probably go for option two, the computer model.

The story was picked up by a number of publications, including: AdvisorOne, the Associated Press, Bloomberg Businessweek, InvestmentNews, the New York Times, Pensions & Investments, PlanSponsor and the Wall Street Journal.

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Company Press Release

WASHINGTON – The U.S. Department of Labor’s Employee Benefits Security Administration today issued a final regulation that will enhance retirement security by improving workers’ access to quality fiduciary investment advice.  The regulation implements a prohibited transaction exemption under an amendment to the Employee Retirement Income Security Act and the Internal Revenue Code that is part of the Pension Protection Act of 2006.

“Given the rise in participation in 401(k)-type plans and IRAs, the retirement security of millions of America’s workers increasingly depends on their investment decisions,” said EBSA Assistant Secretary Phyllis C. Borzi. “This rule will make high-quality fiduciary investment advice more accessible, while providing important safeguards to minimize potential conflicts of interest.”

The prohibited transaction rules in ERISA and the IRC generally prevent a fiduciary investment adviser from recommending plan investment options if the adviser receives additional fees from the investment providers. Although these rules protect participants from conflicts of interest, ERISA provides exemptions from the rules in appropriate circumstances and permits the department to grant exemptions that have participant-protective conditions. The new regulation implements an exemption that Congress enacted as part of the Pension Protection Act of 2006 to improve participant access to fiduciary investment advice, which contains certain safeguards and conditions to prevent investment advisers from providing biased advice that is not in a participant’s best interest. 

To qualify for the exemption in the final regulation, investment advice must be given through the use of a computer model that is certified as unbiased by an independent expert or through an adviser compensated on a “level-fee” basis, meaning that the fees do not vary based on investments selected.  Both types of arrangements  must also satisfy several other conditions, including the disclosure of the adviser’s fees and an annual audit of the arrangement for compliance with the regulation.

This regulation is separate from and does not affect the Labor Department’s proposed rule on the definition of fiduciary investment advice, which the department recently announced that it will re-propose.

The regulation will be published in the Oct. 25 Federal Register and can be viewed at http://s.dol.gov/J4.

U.S. Department of Labor news materials are accessible at www.dol.gov. The information above is available in large print, Braille, audio tape or disc from the COAST office upon request by calling 202-693-7828 or TTY 202-693-7755. 

Edited by: Neil Anderson, Managing Editor


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