Department of Labor Reproposes Guidance on Providing Investment Advice to ERISA Plan and IRA Participants

Background

In 2006, Congress attempted to expand the availability of individualized investment advice to individual retirement account (“IRA”) holders, and participants in ERISA plans otherwise entitled to direct the investment of their accounts, by exempting from the prohibited transaction rules of ERISA and the Internal Revenue Code the provision of investment advice by qualified investment professionals where the advice is either

• generated by a computer model applying generally accepted investment theories to the investment options available to the participant or holder, or
• based on generally accepted investment theories, taking into account the circumstances of the participant or holder (for example, age and risk tolerance), provided the professional is not compensated in any part based on the particular investment products recommended (a/k/a “fee-leveling”).

The Department of Labor (“DOL”) followed up this congressional action with a final regulation elaborating on the conditions to Congress’ statutory exemption. It also proposed an administrative exemption to expand upon Congress’ statutory exemption. With the change in government administrations in 2008, however, the effective date of the DOL’s final regulation was repeatedly extended through the course of 2009, and the final regulation ultimately withdrawn in November of 2009.

The New Proposed Regulation

On February 26 the DOL reproposed its final regulation interpreting the statutory exemption, to be effective for transactions occurring 60 days or more after publication as a final regulation. Comments on the proposal may be made to the DOL through May 5, 2010.

What’s new? There is almost nothing in the regulation as reproposed which did not appear (in almost the same words) in the withdrawn final regulation. The sole exception concerns the content of any computer model: it may not take into account distinctions between investment options based on factors that “cannot confidently be expected to persist in the future.” According to the DOL, differences in fees and management styles are likely to persist, but differences in historical performance “are less likely to persist and therefore less likely to constitute appropriate criteria for asset allocation [among investment options within an asset class].”

What’s missing? The reproposed final regulation omits in its entirety the administrative exemption contained in the withdrawn final regulation. The administrative exemption was intended to complement the statutory exemption by extending the statutory exemption (on similar conditions) to circumstances not clearly addressed by the statutory exemption. Those circumstances included

• providing individual recommendations requested by participants or IRA holders after having delivered, e.g., the results of a computer-modeled asset allocation,¹ and
• providing IRA holders with individual recommendations in circumstances where the available investment options are so broad as to make computer modeling or advice based solely on generally accepted investment theories impractical.

The administrative exemption would also have provided relief for investment advice provided under level fee arrangements, so long as only the employee, registered representative or agent providing the investment advice had no financial incentive to suggest particular investment options. The statutory exemption, and the reproposed final regulation, require that neither the employee, registered representative or agent providing the investment advice, nor the entity on whose behalf the employee, etc. is acting, have a financial incentive to favor particular investment options.² 

For more information about the subject matter of this alert, please contact any of the lawyers listed below:

Russell E. Isaia, Employee Benefits Practice Group Leader, russell.isaia@bingham.com, 617.951.8427

Natascha S. George, Partner, natascha.george@bingham.com, 617.951.8330

¹The statutory exemption specifically acknowledges that participants or IRA holders might ask for additional recommendations after receiving the asset allocation investment advice contemplated by the exemption. The statute is unclear, however, whether the exemption applies to the delivery of those additional recommendations, or the investment transactions that might result.

²The reproposed final regulation continues to reflect the DOL’s position that the statutory exemption does not require affiliates of the advising entity and individual to receive only level fees among the investment options.