ERISA attorneys say the Aug. 22 proposed class exemption proposes to extend the relief from fee leveling to firms that don't operate their investment advice and investment management services through separate affiliates.
“The class exemption is a helpful effort by the Department of Labor to rationalize the investment advice structure Congress created with the Pension Protection Act,” said Jason Bortz, an ERISA attorney for Davis & Harman LLP, Washington.
“The net result is it's going to be a lot easier for plan participants to get investment advice and a lot easier for advisers to give investment advice to the largest possible group of people,” added Melanie Nussdorf, a partner at the law firm Steptoe & Johnson LLP, Washington.
DOL officials say the exemption would make it easier for defined contribution plan participants and individual retirement account holders to get personalized investment advice.
But the proposal comes with a number of strings attached.
It essentially says that advice would generally be OK if offered through computer models independently certified to be unbiased or if the compensation of the adviser providing one-on-one consultation doesn't vary depending on the investments selected based on the advice.
The proposed exemption also would permit advisers to provide participants with follow-up advice if the participants want more options than those offered by a computer model.
To qualify as an “eligible investment advice arrangement,” under the proposed exemption, advice also would have to rely on “generally accepted” investment theories and take into account the participant's retirement age, risk tolerance and investment preferences.
In addition, to qualify as an EIAA, the advice arrangement must be expressly approved by a plan fiduciary and audited at least annually. The manager also must disclose to participants all fees or compensation that the manager or its affiliates might receive and keep records on the advice for at least six years.
Despite the fact that the department's proposed class exemption would allow major mutual fund companies to offer their own advice, it's unclear how the ruling will affect existing advice providers.
The class exemption could stimulate interest in the proprietary advice programs offered by Vanguard Group Inc., Malvern, Pa., said Dennis Simmons, a principal in Vanguard's ERISA and fiduciary services team.
“At the end of the day, it will help our advice programs because plan sponsors will have a clear road map in confirming that the programs are consistent with ERISA,” he said.
Nonetheless, Mr. Simmons said Vanguard planned to continue offering interested plan sponsors the independent third-party advice services of Financial Engines Inc., Palo Alto, Calif.
At T. Rowe Price Retirement Plan Services Inc., Baltimore, officials have no plans to provide direct advice. “Right now, we expect to continue with our existing model” of using third-party providers, said spokesman Brian Lewbart.
A spokesman for Fidelity Investments, Boston, had no comment.
Peng Chen, president of Ibbotson Associates, Chicago, said there still will be a place for independent advice providers. “A lot of record keepers and plan sponsors will continue preferring third parties because of the independence and experience and the potential cost savings a firm like Ibbotson can bring to the table,” he said.
As of June 30, Chicago-based Morningstar Inc. subsidiaries Morningstar Associates LLC and Ibbotson Associates were providing third-party computer-model advice to 15.6 million retirement plan participants through 136,000 plan sponsors and 29 plan providers, according to Courtney Goethals Dobrow, a Morningstar spokeswoman.
Comments on the proposed class exemption, along with a related proposed regulation, are due Oct. 6. They can be emailed to [email protected].
Contact Doug Halonen at [email protected]