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U.S. Department of Labor
Employee Benefits Security Administration
February 26, 2010
The Pension Protection Act of 2006 (PPA)
amended the Employee Retirement Income Security Act of 1974 (ERISA)
to create a new statutory exemption from the prohibited transaction
rules to expand the availability of investment advice to
participants in 401(k)-type plans and individual retirement accounts
(IRAs), subject to safeguards and conditions. The Department of
Labor (DOL) is publishing in the Federal Register a proposed rule to
implement these PPA provisions and make investment advice more
accessible for millions of Americans in 401(k) type plans and
individual retirement arrangements (IRAs).
EBSA is responsible for administering and
enforcing the fiduciary, reporting, and disclosure provisions of
Title I of the ERISA. The agency oversees approximately 708,000
private pension plans, including 483,000 participant-directed
individual account plans such as 401(k)-type plans, and millions
of private health and welfare plans that are subject to ERISA.
As of 2007, more than one-half of
private-sector employees participated in defined contribution
plans that allow for participant direction, with these plans
covering 60 million active participants and holding about $3
trillion in assets.
In general, investment advice given by an
investment adviser to plan participants on investments that pay
additional fees to the adviser or its affiliates can violate the
prohibited transaction rules of ERISA and the Internal Revenue
Code. This has limited the types of investment advice
arrangements available to participants in 401(k) plans and IRAs.
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. Thus, there is increased recognition of the
importance of investment advice in helping participants avoid
costly investment errors.
The Department published a Request for
Information in December 2006, published a proposed regulation in
August 2008, and held a public hearing on October 21, 2008. A
final rule and related class exemption published in January 2009
were withdrawn in November 2009 in response to concerns raised
in public comment letters questioning the adequacy of the final
class exemption's conditions to mitigate the potential for
investment adviser self-dealing.
After review, the Department decided to
propose a revised rule limited to the implementation of the PPA
statutory exemption relating to investment advice.
The proposed regulation allows investment
advice to be given under the statutory exemption in two ways.
One is through the use of a computer model certified as
unbiased. The other way is through an adviser compensated on a
"level-fee" basis (i.e., fees do not vary based on
investments selected by the participant).
Several other requirements also must be
satisfied, including disclosure of fees the adviser is to
receive. The regulation contains some key safeguards and
Requiring that a plan fiduciary
(independent of the investment adviser or its affiliates)
select the computer model or fee leveling investment advice
Imposing recordkeeping requirements for
investment advisers relying on the exemption for computer
model or fee leveling advice arrangements.
Requiring that computer models must be
certified in advance as unbiased and meeting the exemption’s
requirements by an independent expert.
Establishing qualifications and a
selection process for the investment expert who must perform
the above certification.
Clarifying that the fee-leveling
requirements do not permit investment advisers (including
its employees) to receive compensation from affiliates on
the basis of their recommendations.
Establishing an annual audit of
investment advice arrangements, including the requirement
that the auditor be independent from the investment advice
Requiring disclosures by advisers to plan
The Department will publish the proposed
regulation in the Federal Register on March 2, 2010. The Notice of
Proposed Rulemaking (NPRM) invites public comments from interested
persons on the proposed regulation’s conditions applicable to
investment advice arrangements. Public comments can be submitted
electronically by email to e-ORI@dol.gov or by using the Federal
eRulemaking portal at www.regulations.gov. All comments will be
available to the public, without charge, online at
www.regulations.gov and www.dol.gov/ebsa, and at the EBSA Public
The Department estimated that over 83,000
defined contribution pension plans with approximately 2 million
participants and approximately 13 million IRA beneficiaries will
be affected by the proposed rule.
EBSA believes the proposed regulation will
benefit plan participants by facilitating the availability of
quality, expert investment advice to more retirement plan
The increased high quality investment advice
will allow plan participants to make better investment decisions
and have a higher income after retirement. The improved
investment results will reflect reductions in investment errors
such as poor trading strategies and inadequate diversification.
EBSA expects that benefits from the proposed
regulation will be approximately $8 billion annually due to
improved investment results of participants. As annual costs are
estimated at about $2 billion per year, the proposed rule is
expected to result in net benefits of approximately $6 billion
The Department estimated that the regulation
will affect 16,000 investment advisory firms (including
broker-dealers). The main components of the cost of the
regulation are: 1) the preparation and sending of 15 million
disclosure statements to plan participants by plans annually, 2)
the preparation of policies and procedures to assure compliance
with the conditions of the exemption, 3) the preparation and
maintenance of records, 4) the certification of the computer
model investment advice arrangement, and 5) the audit of the
investment advice arrangement.
The costs in the first year for the statutory
exemption include $240 million for the preparation and
distribution of disclosures, $289 million to audit the
investment advice arrangement, and $538 million to certify the
computer investment advice arrangement.
The costs in all subsequent years for the
statutory exemption also include $125 million for the
preparation and distribution of disclosures, $289 million to
audit the investment advice arrangement, and $269 million to
certify the computer investment advice arrangement.
This fact sheet has been developed by the U.S. Department of Labor, Employee Benefits Security Administration, Washington, DC 20210. It will be made available in alternate formats upon request: Voice phone: 202.693.8664; TTY: 1.202.501.3911. In addition, the information in this fact sheet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996.