EBSA Issues Final Rule on Statutory Exemption for Fiduciary Advisors Offering Eligible Investment Advice Arrangements | Practical Law

EBSA Issues Final Rule on Statutory Exemption for Fiduciary Advisors Offering Eligible Investment Advice Arrangements | Practical Law

On October 25, 2011, the Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) issued final regulations exempting fiduciary advisors, giving participants and beneficiaries investment advice under an eligible investment advice arrangement, from certain of the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (IRC).

EBSA Issues Final Rule on Statutory Exemption for Fiduciary Advisors Offering Eligible Investment Advice Arrangements

by PLC Employee Benefits & Executive Compensation
Published on 25 Oct 2011 • USA (National/Federal)
On October 25, 2011, the Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) issued final regulations exempting fiduciary advisors, giving participants and beneficiaries investment advice under an eligible investment advice arrangement, from certain of the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (IRC).
On October 25, 2011, the Department of Labor's Employee Benefits Security Administration issued final regulations implementing a statutory prohibited transaction exemption for fiduciary advisors offering participants and beneficiaries investment advice under an eligible investment advice arrangement. The Pension Protection Act of 2006 amended the Employee Retirement Income Security Act of 1974 (ERISA) to add a statutory exemption under Sections 408(b)(14) and 408(g) of ERISA and Sections 4975(d)(17) and 4975(f)(8) of the Internal Revenue Code, to expand the availability of fiduciary investment advice to participant-directed defined contribution plans. The regulations will go into effect and will be applicable to all transactions occurring on or after December 27, 2011.
The statutory exemption allows fiduciary investment advisers to receive compensation from investment vehicles they recommend to plan participants if they provide advice under an eligible investment advice arrangement. Under the regulations, an eligible investment advice arrangement must satisfy at least one of the following sets of conditions:
  • The fiduciary advisor is compensated on a "level-fee" basis, where the:
    • investment advice given is based on generally accepted investment theories considering historic risks and returns of different asset classes over a defined period of time;
    • advice takes into account related fees and expenses;
    • advice takes into account information such as the participant's or beneficiary's age, life expectancy, retirement age, risk tolerance and investment preferences; and
    • fiduciary advisor's fees do not vary based on the participant's or beneficiary's selection of a particular investment option.
  • The investment advice provided by the fiduciary advisor is based on a computer model that is certified in advance by an independent expert as:
    • unbiased;
    • applying generally accepted investment theories; and
    • generally satisfying the exemption's requirements.
Under the regulations, eligible investment advice arrangements must also be:
  • Authorized by a plan fiduciary.
  • Subject to annual audits, including the requirement that the auditor be independent from the provider of investment advice.
  • Disclosed by advisors to plan participants. The final regulation includes a model Fiduciary Adviser Disclosure to participants and beneficiaries.
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