On August 21, 2008, the U.S. Department of Labor issued a Press Release entitled "U.S. Labor Department proposes rules on investment advice exemption for 401(k) plans and IRAs" that announced publication the next day of proposed regulations to govern rendering of investment advice for 401(k) and IRA plans.
The U.S. Department of Labor today announced publication of two proposed rules under the Pension Protection Act (PPA) to make investment advice more accessible for millions of Americans in 401(k) type plans and individual retirement accounts (IRAs). * * *The proposed regulations were published in the Federal Register on August 22, 2008 (Volume 73, Number 164) by the Employee Benefits Security Administration as document 49896–49923 [E8–19272] entitled Investment Advice; Participants and Beneficiaries (also available in PDF format as amendments to 29 CFR Parts 2550, 29 pages).
"These proposals would give workers greater access to investment advice so that they are better equipped to manage and monitor their 401(k) plans and Individual Retirement Accounts," said U.S. Secretary of Labor Elaine L. Chao.
The PPA amended the Employee Retirement Income Security Act (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 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. * * *
This is the "Summary" of the proposed regulations, as contained in the published notice:
This document contains proposed regulations implementing the provisions of the statutory exemption set forth in sections 408(b)(14) and 408(g) of the Employee Retirement Income Security Act, as amended (ERISA or the Act), and parallel provisions in the Internal Revenue Code of 1986, as amended (Code), relating to the provision of investment advice described in the Act by a fiduciary adviser to participants and beneficiaries in participant-directed individual account plans, such as 401(k) plans, and beneficiaries of individual retirement accounts (and certain similar plans).The Press Release solicited comments on the proposed regulations, which are due by October 6, 2008:
Section 408(b)(14) provides an exemption from certain prohibited transaction provisions in ERISA with respect to the provision of investment advice, the investment transaction entered into pursuant to the advice, and the direct or indirect receipt of fees or other compensation by the fiduciary adviser or an affiliate in connection with the provision of advice or the transaction pursuant to the advice.
Section 408(g) describes the conditions under which the investment advice related transactions are exempt.
Upon adoption, the regulations will affect sponsors, fiduciaries, participants and beneficiaries of participant-directed individual account plans, as well as providers of investment and investment advice-related services to such plans.
Written comments on the investment advice proposals should be addressed to the Office of Regulations and Interpretation, Employee Benefits Security Administration, Room N-5665, U. S. Department of Labor, 200 Constitution Ave., NW, Washington, D.C. 20210, Attn: Investment Advice Regulations.On September 8, 2008, Blaine F. Aikin, the President and CEO of Fiduciary 360 LP, in Sewickley, PA, expressed concerns about the proposed regulations in an article entitled "Can brokers be fiduciaries?" posted on Investment News.
The public also may submit comments electronically by email to firstname.lastname@example.org, or through the federal e-rulemaking portal at www.regulations.gov.
He evaluated the new DOL guidelines as "a problematic development."
Judging by newly proposed regulations on investment advice, it looks as if the Department of Labor is trying hard to engineer a sharp turn from the course established by Congress. * * *
[T]he DOL simultaneously proposed a new class exemption to allow commission-based registered representatives to become fiduciary advisers and give advice to participants and beneficiaries of participant-directed retirement plans and individual retirement accounts.
The new class exemption is a very big change that the DOL contended will "increase the variety of investment advice arrangements that are available and potentially lower the cost and promote the marketing of such arrangements, to the benefit of participants." * * *
The DOL has seized on the opportunity created by the act to expand on the idea that most investors need advice. It chose to do so in two ways.
First, it would extend the regulations to address advice given to IRA account holders.
Second, it proposed to allow conflicted financial services reps to give advice in competition with the fiduciary advisers contemplated under the act. * * *
Aikin noted that the first component is consistent with Congressional intention, but the second is not. He concluded: "Whether investors will in fact benefit hinges upon whether all fiduciary advisers will be able to adapt to the new rules, and the fiduciary standard of care they are designed to promote, quickly and effectively."
For Aikin's more generic recommendations regarding a fiduciary's conduct in an investment setting, see: "A warning light for fiduciaries -- What you can do about the increasing risk of litigation from disgruntled investor" (06/09/08).
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