STATEMENT FOR THE RECORD OF ALAN D. LEBOWITZ
DEPUTY ASSISTANT SECRETARY OF LABOR FOR PROGRAM OPERATIONS
COMMITTEE ON EDUCATION AND LABOR
SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS
UNITED STATES HOUSE OF REPRESENTATIVES
March 24, 2009
Thank you for inviting the Department of Labor to provide a statement for the record for the Committee on Education and Labor Subcommittee on Health, Employment, Labor and Pensions' hearing entitled "Retirement Security: The Importance of an Independent Investment Adviser." I am Alan D. Lebowitz, the Deputy Assistant Secretary of Labor for Program Operations for the Department of Labor's Employee Benefits Security Administration (EBSA). My statement today will discuss the Department's activities related to investment advice. Also, I will describe the Department's regulatory initiatives on investment advice implementing provisions of the Pension Protection Act of 2006 (PPA), and extension of the effective date of those initiatives.
Growth of Participant-Directed Individual Account Plans and IRAs
Our agency's mission is to protect the security of retirement, health and other employee benefits for America's workers, retirees and their families, and to support the growth of our private benefits system. EBSA is responsible for administering and enforcing the fiduciary, reporting, and disclosure provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). EBSA oversees approximately 700,000 private pension plans, including almost 460,000 participant-directed individual account plans such as 401(k) plans, and millions of private health and welfare plans that are subject to ERISA.
Individual Americans are increasingly responsible for their own retirement security. Most shoulder that responsibility primarily by saving and investing in tax preferred vehicles such as 401(k) and other job-based "defined contribution" savings plans, and individual retirement accounts (IRAs). Forty-three percent of private-sector employees participate in a defined contribution plan, compared with just 20 percent who participate in a defined benefit pension plan. Altogether, 38 percent of U.S. families have job-based defined contribution plans and 31 percent have IRAs 14 percent have both while just 32 percent have traditional "defined benefit" plan pensions. In dollar terms, families hold some $2.7 trillion in private-sector DC plans and $4.7 trillion in IRAs, while private-sector defined benefit plans hold assets of $1.9 trillion.
With the dramatic growth of participant-directed individual account plans, there has been an increasing recognition of the importance of investment advice to participants and beneficiaries in such plans and IRAs. Over the past several years, the Department has issued various forms of guidance concerning when a person would be a fiduciary by reason of rendering investment advice and when the provision of investment advice might result in prohibited transactions.
Under ERISA, a fiduciary includes a person that renders investment advice for a fee or other compensation, direct or indirect with respect to any moneys or other property of a plan, or has any authority or responsibility to do so. In general, the prohibited transaction provisions of ERISA prohibit an investment advice fiduciary from using the authority, control or responsibility that makes it a fiduciary to cause itself, or a party in which it has an interest that may affect its best judgment as a fiduciary, to receive additional fees. Parallel provisions of the Internal Revenue Code impose excise taxes on fiduciaries participating in prohibited transactions. As a result, in the absence of a statutory or administrative exemption, fiduciaries are prohibited from, and subject to excise taxes based on, rendering investment advice to plan participants regarding investments that result in the payment of additional advisory and other fees to the fiduciaries or their affiliates.
In 1975, the Department issued regulations that define the term "investment advice" for purposes of determining whether the adviser is a fiduciary under ERISA. Generally speaking, these regulations provide that a person without discretionary authority to actually make investments renders investment advice only if the advice is provided on a regular basis with a mutual understanding that it will be individualized and take into account the characteristics and needs of the plan, and that the advice will serve as the primary basis for the plan's investment decisions.
In 1996, the Department issued guidance relating to participant investment education in response to representations that participant-directed plan sponsors were reluctant to educate their employees about investment principles, financial planning and retirement. The reluctance was because of uncertainty regarding the extent to which the provision of investment-related information may be considered providing investment advice and therefore subject to ERISA's fiduciary provisions. The guidance, Interpretive Bulletin 96-1 relating to participant investment education, is intended to assist plan sponsors, service providers and participants and beneficiaries in determining when activities designed to educate and assist participants and beneficiaries in making informed investment decisions will not cause persons engaged in such activities to become fiduciaries with respect to a plan by virtue of providing investment advice to plan participants and beneficiaries.
During the 1990s, the Department also provided guidance confirming that fiduciaries providing investment advice could receive level fees in connection with recommended plan or IRA investments without violating ERISA's prohibitions on self-dealing or on receiving kick-backs.
In 2001, the Department issued to SunAmerica an advisory opinion in which the Department concluded that the provision of fiduciary investment advice, under circumstances where the advice provided by the fiduciary with respect to investment funds that pay additional fees to the fiduciary is the result of the application of methodologies developed, maintained and overseen by a party independent of the fiduciary, would not result in prohibited transactions.
The Pension Protection Act of 2006 and Regulatory Initiatives
Responding to the need to afford participants and beneficiaries greater access to professional investment advice, Congress amended the prohibited transaction provisions of ERISA and the Internal Revenue Code, as part of the PPA. The intent was to permit a broader array of investment advice providers to offer their services to participants and beneficiaries responsible for investment of assets in their individual accounts and, accordingly, for the adequacy of their retirement savings.
Specifically, section 601 of the PPA added a statutory exemption under ERISA section 408(b)(14) describing investment advice-related transactions that will not be prohibited if specific requirements are met. The transactions described include the provision of investment advice to the participant or beneficiary with respect to a security or other property available as an investment under the plan; the acquisition, holding or sale of a security or other property available as an investment under the plan pursuant to the investment advice; and the direct or indirect receipt of compensation by a fiduciary adviser or affiliate in connection with the provision of investment advice or the acquisition, holding or sale of a security or other property available as an investment under the plan pursuant to the investment advice. The statutory exemption conditions relief on, among other things, certain disclosures, and either level compensation to the fiduciary adviser or the use of a computer model to formulate the investment advice.
With respect to IRAs, the PPA directed the Department to determine whether there is any computer model investment advice program that meets, among other things, certain of the criteria set forth in the conditions of the statutory exemption. The PPA specified that the computer-model provisions of the statutory exemption were not available for advice involving IRAs pending the Department's determination, and directed the Department to issue a class exemption if it found that there was no such computer model investment advice program.
On December 4, 2006, the Department published a Request for Information (RFI) in the Federal Register soliciting information to assist the Department in the development of regulations. Specifically, the Department invited interested persons to address the qualifications for the "eligible investment expert" that is required to certify that computer models used in connection with the statutory exemption meet the requirements of the statutory exemption. The Department also invited interested persons to provide information to assist the Department in developing procedures to be followed in certifying that a computer model meets the requirements of the statutory exemption. The Department also invited suggestions for a model disclosure form for purposes of the statutory exemption. In response to the RFI, the Department received 24 letters addressing a variety of issues presented by the statutory exemption.
The Department, on the same date, also published an RFI in the Federal Register soliciting information to assist the Department in determining the feasibility of using computer models in connection with IRAs, as required by the PPA.
In response to questions raised after the PPA's enactment, the Department, on February 2, 2007, issued Field Assistance Bulletin 2007-01 addressing certain issues presented by the new statutory exemption. In the Bulletin, the Department concluded that only the fees or other compensation of the fiduciary adviser, and any individual providing advice on its behalf, may not vary based on recommended investments, because that section references the fiduciary adviser and is silent as to affiliates. The FAB explicitly preserved all of the Department's prior guidance on investment advice, and also addressed fiduciary duties, and liability, with respect to monitoring investment advice providers.
The Department held the first of two hearings on July 31, 2007, to solicit additional information. The first hearing was held to examine the feasibility of the application of computer model investment advice programs for IRAs. The Department was interested in obtaining information on all aspects of computer model based investment advice programs for IRAs that would help in making the required determination, including additional information relating to the questions posed in the RFI. In particular, the Department was interested in understanding what particular types of investments or asset classes a computer model program should take into account in order to provide appropriate advice to IRA beneficiaries. The Department also sought additional information on the manner in which such programs could operate without bias as to investments offered by the fiduciary advisor or an affiliate, if the particular advice program allocates IRA assets among only such investments. The Department was also interested in knowing whether the scope of relief from ERISA's prohibited transaction provisions afforded by the statute is adequate to facilitate the use of computer-based programs for IRAs, should the Department determine that such programs are feasible. Conversely, the Department sought information concerning the scope of relief that would be necessary, and the conditions that would be appropriate, if it were necessary to issue the class exemption.
On August 21, 2008 , the Department submitted its report to Congress in which it concluded there are computer model investment advice programs which meet all the criteria set forth in section 601(b)(3)(B) of the PPA. Specifically, the Department identified computer models that: (1) utilize relevant information about the account beneficiary; (2) take into account the full range of investments, including equities and bonds, in determining the options for the investment portfolio of the account beneficiary; and (3) allow the account beneficiary sufficient flexibility in obtaining advice to evaluate and select investment options. This determination by the Department lifted the restriction imposed by the PPA on the availability of the statutory exemption for the provision of computer model investment advice to IRAs.
On August 22, 2008, the Department published in the Federal Register a proposed regulation that, upon adoption, would implement the provisions of the statutory exemption relating to the provision of investment advice to participants and beneficiaries in participant-directed individual account plans, and beneficiaries of IRAs (and certain similar plans). On the same date, the Department also published a notice in the Federal Register proposing to adopt a class exemption addressing the provision of investment advice to participants and beneficiaries of self-directed individual account plans, such as 401(k) plans, and IRAs. The proposed class exemption both built upon and expanded the circumstances under which investment advice could be provided to participants and beneficiaries in individual account plans and beneficiaries of IRAs.
On October 21, 2008, the Department held a public hearing on the proposed regulation and proposed class exemption in an effort to further develop the public record regarding the regulation and class exemption and to assist the Department in understanding the issues and other concerns raised by the written comments.
On January 21, 2009, the Department published a final rule on the provision of investment advice to participants and beneficiaries of participant-directed individual account plans and to beneficiaries of individual retirement accounts). The rule contains regulations implementing the statutory prohibited transaction exemption under ERISA section 408(b)(14) and section 408(g) and an administrative class exemption granting additional relief. As published, the rule would be effective on March 23, 2009.
On February 4, the Department proposed to extend for 60 days, until May 22, 2009, the effective and applicability dates of the final investment advice rule. The extension of the effective date was to allow the Department to evaluate comments on questions of law and policy concerning the rule. The document also sought comments on a further extension of the effective date and, more generally on the rule and on the merits of rescinding, modifying or retaining the rule. On March 20, on the basis of comments received on the proposal, the Department extended the effective and applicability dates of the rule for 60 days, until May 22, 2009, and is currently considering whether an additional extension would be appropriate to give the new Administration the opportunity to consider what actions they wish to take in light of the comments received on the rule.
Thank you for the opportunity to provide my written statement for the record. The Department is committed to supporting the growth of participant-directed individual account plans through the provision of investment advice while ensuring the security of retirement benefits.
Based on Federal Reserve Board Survey of Consumer Finances. Figures are for 2007. DC and DB plan figures include both private- and public-sector employee plans. IRA figures include Keogh plans. Figures include both working and retired families.
The Department interprets the requirement that fees received by a fiduciary adviser not vary on the basis of any investment option selected as meaning that the fees or other compensation (including salary, bonuses, awards, promotions or any other thing of value) received, directly or indirectly from an employer, affiliate or other party, by a fiduciary adviser (or used for the adviser's benefit) may not be based, in whole or part, on the investment options selected by participants or beneficiaries.