This may sound familiar. Soon, the U.S. Department of Labor is expected to issue proposed regulations on investment advice programs provided by employer retirement plan sponsors, intended to enforce the investment advice provisions included in the Pension Protection Act of 2006.
The agency released proposed investment advice regulations in August 2008 and finalized those rules a little more than a year ago, in the final days of the Bush administration.
Shortly thereafter, President Obama's chief of staff, Rahm Emanuel, issued a memorandum urging agency heads to consider a 60-day extension of the effective date (and a reopening of the comment period) for regulations published but not yet effective. The final regulations were subsequently delayed again and again, until the agency finally withdrew them in November 2009.
At issue are the statutory prohibited transaction rules, which generally prevent the provision of investment advice where an advisor could benefit based on the advice given. Prior to the PPA, it was clear that certain advice arrangements did not involve any conflict of interest and thus did not violate the prohibited transaction rules. Most advice arrangements continue to rely on a DOL Advisory Opinion generally referred to as "SunAmerica," under which a plan advisor is allowed to arrange for advice to be given to participants based solely on a computer model designed and exclusively controlled by an independent third party. As an alternative to SunAmerica, advice could be given by an advisor that receives the same compensation regardless of which investment option is chosen. This is often referred to as the "level fee rule."
In 2006, the PPA created two exceptions to the prohibited transaction rules. It allowed a financial institution to design its own computer model to provide investment advice, even if the financial institution may benefit based on the investment options chosen. Unlike SunAmerica, the computer model need not be developed by an independent third party, but the financial institution's computer model must be certified by an independent third-party expert as valid and unbiased. The PPA computer model also includes extensive and costly disclosures, audits and other administrative requirements.
A new class exemption included in the DOL final regulations of January 2009 took this a step further, saying that the financial institution that developed the computer model may also provide advice to supplement the computer model, upon request from the participant, as long as the provider discloses additional information.
The PPA also codified the level-fee rule, with disclosure and auditing requirements equivalent to that of the computer model. The now-withdrawn final regulations of January 2009 permitted variation in the compensation of an affiliate of the entity employing the advisor, and the class exemption allowed investment advice to a participant as long as the investment options chosen did not affect the compensation of the advisor.
When the DOL issues its new proposed regulations, expected this month, it will likely eliminate the class exemption mentioned above, tightly restricting computer-model plans (closer to the SunAmerica standard) and requiring fee-leveling plans to account for compensation from the advisor's employer. The new rules may also eliminate the exclusion for affiliates of the advisor's employer, as well.
Of course, by that time, there may be new changes afoot. The 401(k) Fair Disclosure and Pension Security Act, approved by the U.S. House of Representatives Education and Labor Committee in 2009, included provisions that would effectively repeal the PPA investment advice statutes. It also would preclude a plan fiduciary from arranging for an investment adviser to provide investment advice to the plan or to a plan participant unless the investment adviser is an "independent investment adviser." The measure also fails to explicitly recognize the value of arrangements based on the SunAmerica opinion. At press time, the fate of that legislation - and the advice provision, in particular - is uncertain, but there remains a strong desire among some lawmakers to re-legislate the advice elements of PPA.
And if that comes to pass, it will require an entirely new round of DOL regulations, which will be d?j? vu all over again.
