Myers and Mark Smith On October 25, 2011, the Department of Labor (DOL) published its final regulation implementing the ERISA prohibited transaction exemptions for participant investment advice enacted in the Pension Protection Act of 2006 (PPA). This final regulation brings to a conclusion an almost five-year process to implement the PPA exemptions permitting "level fee" and "computer model" advice for retirement plan participants and IRA beneficiaries. In broad scope, the final regulation retains the general structure and terms of the Obama Administration's March 2, 2010 proposal, with several refinements and clarifications. The regulation is effective as of December 27, 2011.BackgroundThe shift towards participant-directed retirement plans that took hold in the 1990s had the unintended consequence of reducing the portion of retirement assets that are invested with the benefit of professional investment advice. Moreover, the businesses already in service relationships that could accommodate that advice - the retirement platform, product and service providers that evolved to serve the defined contribution and IRA markets - often have been impeded by ERISA from providing investment advice. To the extent those providers (or an affiliate) had an economic stake in the investment options available and thus in the investment choices made under the retirement plan or IRA, an ERISA prohibited transaction generally would occur if the investment advice would cause the provider to be an ERISA fiduciary. (Providing "investment advice for a fee," within the meaning of ERISA § 3(21), is one of the three ways to become an ERISA fiduciary.)Even before the PPA, DOL issued guidance elucidating circumstances in which investment support for participants would not raise this prohibited transaction concern:
Also, certain class exemptions issued by DOL providing relief for specific investment transactions at least arguably include relief for any investment advice leading to those transactions. Where prohibited transaction concerns were present, however, there was no comprehensive ERISA solution for providing investment advice to participants, and that regulatory gap (coupled with the incremental cost of investment advice) meant that no more than 10% of participants and IRA beneficiaries were making investment choices with the benefit of professional assistance.Recognizing the importance to national retirement security of improving the quality of the investment choices made by plan participants and IRA beneficiaries, Congress undertook in the PPA to provide at least that comprehensive legal solution. Both the House and Senate versions of the bill contained an investment advice exemption that would allow these well-positioned providers, among others, to offer investment "advice" without enterprise-wide fee leveling; a more conditional exemption was included in the House bill, a somewhat less conditional version in the Senate bill. The conference committee agreement generally favored the House version, which was enacted as section 601 of the PPA and provides relief for certain "level fee" and "computer model" advice arrangements.4Starting in December 2006, the Bush Administration commenced a regulatory process that culminated in the January 21, 2009, publication of a regulation not only implementing the statutory exemptions, but completing the logic of the legislation by adding administrative exemptions for "modified level fee" and "off-model" advice. The Obama Administration took exception to this and other "midnight regulations" of the Bush Administration and, in this case, ultimately withdrew the January 2009 regulation in favor of its own March 2010 proposal. The March 2010 proposal differed from the January 2009 regulation in the following important respects:
The Final RegulationThe final regulation makes limited changes to the March 2010 proposal. Among the more significant developments:
A detailed summary of the operation of the final regulation, with other clarifications and refinements noted, is attached at the end of this alert.The practical import of these exemptions on the investment advice available to plan participants and IRA beneficiaries remains uncertain. The conditions imposed by Congress under these exemptions range from meaningful (in the case of the level fee exemption) to formidable (in the case of the computer model exemption). Providers that require prohibited transaction relief to offer participant advice will have to assess whether the compliance costs and risks under the exemptions are acceptable. If not, except where DOL's preexisting guidance offers workable solutions, the desire to protect the potential recipients of such investment advice may mean that such advice remains less widely available than optimal.
------------------------------------------------------------------------------1 Interpretive Bulletin 96-1, 29 C.F.R. § 2509.96-1.2 Advisory Opinion 2001-09A (Dec. 14, 2001).3 Advisory Opinion 2005-10A (May 11, 2005); Advisory Opinion 97-15A (May 22, 1997).4 The exemptions are codified in ERISA §§ 408(b)(14) and 408(g), and in IRC §§ 4975(d)(17) and 4975(f)(8).If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed below or the Sutherland attorney with whom you regularly work.
© 2011 Sutherland Asbill & Brennan LLP. All Rights Reserved.This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.
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