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September 4, 2008

Proposed Rules: Investment Advice Exemption for 401(K) Plans and IRAS

The DOL’s Employee Benefits Security Administration has been busy issuing investment advice guidance provided under 401(k) plans and individual retirement accounts (IRA). 

The Pension Protection Act of 2006 sanctioned participant level investment advice.  There are two models that can be used for giving advice: one is a level-fee model, and the other is a computer modelProposed regulations and a proposed prohibited transaction exemption (“PTE”) have been issued flushing out this advice.  In addition, a recent Report to Congress suggests that a computer model could be used for providing investment advice to IRA-holders. 

It is important for plan sponsors to understand that if participant-level investment advice is to be sanctioned by the plan, the choice of the investment advisor is a fiduciary act.  The level fee model requires that fees charged for investment advice  cannot be based on investment selection, but rather on a level fee basis.  The advice must be based on generally accepted principals, as well as any information provided by participants. 

According to the proposed rules, the computer model can also incorporate personal participant information.  The computer model must be certified by an independent third party, the selection of which is a fiduciary act, according to this guidance. 

If either or both models are implemented, the following must be accomplished:

  • An annual audit would have to be performed by an independent auditor engaged by the fiduciary adviser.  The report must be provided to the plan fiduciary who sanctioned the investment advice arrangement. 
  • The fiduciary adviser has a disclosure requirement to individual participants; the proposed regulations include a model notice that can, but is not required to be used, for this purpose.
  • Special rules would apply to securities transactions, specifically requiring such transactions to comply with relevant securities laws, and requiring that transactions be at least as favorable to plan participants as would be the case in an arm’s length transaction.
  • Records relating to investment advice would have to be kept for six years. 

These rules would become effective 60 days after they are finalized.  The PTE would become applicable 90 days after it is finalized. 


The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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