Monday, January 19, 2009

DOL Final Regulation – Investment Advice – Participants and Beneficiaries

UPDATE: Memorandum Concerning Regulatory Review discusses how public objections from Congressman George Miller (House Education and Labor Committee Chairman) and Congressman Rob Andrews (D-New Jersey) make it likely that changes will be made to this DOL Final Regulation

The DOL announced publication of the final rule on investment advice for 401(k) plans and IRAs:

WASHINGTON — The U.S. Department of Labor today announced publication of a final rule to make investment advice more accessible for millions of Americans in 401(k) type plans and individual retirement accounts (IRAs). The final rule will be published in the Jan. 21, 2009, edition of the Federal Register. The rule includes a regulation that implements the new statutory exemption for investment advice added to the Employee Retirement Income Security Act (ERISA) by the Pension Protection Act (PPA) and a related class exemption.

"Access to professional investment advice is particularly important now for workers as they manage their 401(k) plans and IRAs in changing and volatile financial markets," said Secretary of Labor Elaine L. Chao.

The final rule provides general guidance on the exemption's requirements, including computer model certification and disclosures by fiduciaries. The regulation also includes a model form to assist advisers in satisfying the exemption's fee disclosure requirement. In addition, the final rule includes a class exemption expanding the availability of investment advice.

The PPA amended ERISA by adding a new prohibited transaction exemption that allows greater flexibility for participants of 401(k) plans and IRAs to obtain investment advice. One of the ways in which investment advice may be given under the exemption is through the use of a computer model certified as unbiased. The other way is through an adviser compensated on a "level-fee" basis. Several other requirements also must be satisfied, including disclosure of fees the adviser is to receive.

"Millions of American workers are responsible for managing their 401(k) and IRA accounts. The department took extraordinary steps to engage a broad spectrum of participants, employers, plan fiduciaries and others throughout the rulemaking process," said Bradford P. Campbell, assistant secretary of the Labor Department's Employee Benefits Security Administration. "The final rule expands access to investment advice without compromising the critical protections for plan participants and beneficiaries. "

The department published a Request for Information in December 2006, published a proposed regulation in August 2008 and held a public hearing on the proposals on Oct. 21, 2008.

OMB Approves DC Advice Rule provides some analysis:

The DOL's investment advice rule is controversial because it would open the door for mutual funds and other investment companies to offer investment advice directly to participants in DC plans. Mutual fund companies long have been effectively barred from offering direct advice to participants because of fears that the advisers might steer participants to their companies' own investment options.

But under the DOL's rule, mutual fund employees would be able to offer one-on-one advice directly, as long as the employee's compensation doesn't depend on the investment options selected by the participant, and the advice meets other key conditions.

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