In October, the Department of Labor (DOL) issued finalized regulations relating to the giving of investment advice to plan participants which become effective on December 27, 2011.  The regulations provide that fiduciary advisers may give investment recommendations under an “eligible investment advice arrangement” and receive fees for such advice without violating the DOL’s prohibition against “self-dealing”.  While the regulations primarily apply to fiduciary advisers, some provisions do apply to plan sponsors.  One important item for plan sponsors to note is that the selection of a fiduciary adviser is a fiduciary act.

An eligible investment advice arrangement is defined in the regulations as one that uses a computer model or fee leveling for the investment advice.  There are specific requirements that apply to each arrangement.  In addition to these separate requirements, both arrangements must engage an independent auditor to annually determine whether the arrangement meets statutory requirements, and the fiduciary adviser must provide various disclosures without charge.  The Regulations provide a model disclosure that may be used by the fiduciary adviser.  Finally, the plan fiduciary must expressly authorize the investment advice arrangement.

The Regulations also require that the fiduciary adviser provide written notification to the plan fiduciary that the fiduciary adviser intends to comply with the Regulations.

Computer Model Arrangement

To use this type of arrangement, the computer model must be certified by an “eligible investment expert”.  The certification indicates that the model meets ERISA and regulatory requirements.  An eligible investment expert is defined in the regulations as any person, other than someone with a material affiliation or material contractual relationship with the fiduciary adviser, who “has the appropriate technical training or experience and proficiency to analyze, determine and certify” that the computer model meets the requirements in the regulations.

The regulations require that the computer model should be designed and operated to:  (1) “apply general accepted investment theories that take into account the historic risks and returns of different asset classes over defined periods of time”, (2) take into account management fees and expenses for the advice, (3) request, and if given, utilize, individual participant information, (4) use appropriate objective criteria to provide asset allocations, (5) not inappropriately favor investment options that generate more income for the adviser or that are based on a factor that cannot be expected to continue in the future, and (6) take into account all investment options, unless requested by participant to exclude a certain investment from consideration.  However, the model can exclude certain investment options, such as employer stock, target date funds, annuity options, and brokerage windows and similar arrangements.

Fee-Leveling Arrangement

The investment advice under a fee-leveling arrangement must be given based on investment theories (as outlined in (1) above under the computer model arrangement).  In giving the advice, the arrangement must take into account any management fees and expenses and must request, and if given, utilize, individual participant information.  Finally, the fiduciary adviser may not receive, directly or indirectly, any fee or other compensation which is based in whole or in part on the selection of an investment option.

Contact your Nyhart consultant for more information on the investment advice regulations.

This article was last updated on January 3, 2012