Department of Labor Issues Final Rules on Participant Advice

Transcription

1 & Employee Benefits Executive Compensation IN THE NEWS November 2011 Department of Labor Issues Final Rules on Participant Advice A Polsinelli Shughart Update W ith changes brought about by the Pension Protection Act of 2006 (PPA), coupled with final regulations issued by the Employee Benefits Security Administration (EBSA) on October 21, 2011 that create exemptions to the prohibited transaction rules, fiduciary investment advisors will now be able to receive fees from investment providers whose products are recommended to participants. This allows employers greater flexibility in choosing advisors and gives them the ability to provide better quality advice to participants. The prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986, as amended (Code) generally prohibit a fiduciary from dealing with the assets of a tax-qualified retirement plan in his own interest. As a result, employer/plan sponsors were unable to make investment advice available to plan participants through certain investment advisors if those advisors received direct or indirect compensation from the investment vehicles for which their advice was given, which is a common arrangement. Chicago Dallas Denver Edwardsville Jefferson City Los Angeles New York Overland Park Phoenix St. Joseph St. Louis Springfield Topeka Washington DC Wilmington DE Redefining the Business of Law SM

2 The final regulations issued by EBSA require that the investments advisors adhere to newly created safeguards that are designed to prevent the advisor from manipulating their advice for their own financial benefit. These regulations will go into effect and will be applicable to all transactions occurring on or after December 27, Background eligible for the prohibited transaction exemption: (i) levelfee arrangement and (ii) computer modeling arrangement. Level-fee Arrangement Under the level-fee arrangement, the fiduciary advisor is compensated on a "level-fee" basis, where fees do not vary based on the investments selected by the participant. The investment advice provided under a feeleveling arrangement must: With the steep decline in employer-funded, traditional-defined benefit pension plans, participation in 401(k)-type plans and IRAs is on the rise. The average American, however, may not be savvy enough on his own to make sound investment decisions with respect to money held under such plans, which may ultimately lead to him not having sufficient funds to last through retirement. To further complicate the issue, ERISA and the Code generally prohibit certain investment advisors from receiving direct or indirect compensation from those investments vehicles that they recommend to participants in 401(k)-type plans. This prohibition has been found to create a barrier to participants having access to quality investment advice. This barrier, in part, led Congress to amend the prohibited transaction provisions of ERISA and the Code as part of the PPA to provide an exemption to the prohibited transaction rules relating to the provision of investment advice to participants and beneficiaries. Be based on generally accepted investment theories considering historic risks and returns of different asset classes over a defined period of time Take into account related fees and expenses Take into account information such as the participant's or beneficiary's age, life expectancy, retirement age, risk tolerance and investment preferences Not result in the fiduciary advisor's fees varying based on the participant's or beneficiary's selection of a particular investment option Newly Exempted Arrangements The final regulations describe and define the following two general types of eligible investment advice arrangements within which the advice must fit to be Page 2 of 6

3 Computer Modeling Arrangement To be exempt from the otherwise applicable prohibited transaction rules, investment advice provided by the fiduciary advisor may provide advice based on a computer model that is certified in advance by an independent expert as: make recommendations relating to annuity options or any option that the advice recipient specifically asks to be excluded from consideration. The final regulations remove the exemption for making recommendations relating to qualifying employer securities and target date (or life stage ) funds. Applying generally accepted investment theories that consider historic returns of different asset classes over defined periods of time Taking into account investment management fees and other fees associated with the recommended investments Requesting information from the advice recipient and using any data provided that relates to age, life expectancy, risk tolerance, other assets, and additional information that could affect investment selection Using objective criteria to create asset allocation portfolios using plan investment options Avoiding investment recommendations that inappropriately: Favor investment options offered by the fiduciary adviser, or In addition to the above requirements, an eligible investment advice arrangement must be authorized by a plan fiduciary other than the individual or entity offering the investment advice. Further, an independent auditor must conduct an annual audit of the investment advice arrangement to ensure that it continues to comply with the requirements under the final regulations, including the requirement that the auditor be independent from the provider of investment advice. Finally, before any investment advice is provided to a plan participant, the investment advisor must provide written notice to the participant that discloses information including, but not limited to, past performance and historical rates of return of designated investments, fees and compensation that the advisor receives in connection with the advice provided, and how information about the advice recipient may be used by the investment advisor. The final regulations include a model Fiduciary Adviser Disclosure to participants and beneficiaries. Favor investment options that may generate greater income for the fiduciary adviser Appropriately weighing all of the factors used in estimating future returns of investment options Taking into account all designated investment options available under the plan. The regulations exclude self-directed brokerage accounts (and similar arrangements) from the definition of designated investment options, and the computer model generally need not Page 3 of 6

4 What You Should Do Now Employer/plan sponsors should re-evaluate the investment advice offered to plan participants to determine what, if any, new opportunities for enhanced investment advice are available as a result of these final regulations. They should also obtain evidence from potential advisors that an exemption applies or seek legal counsel regarding the application of an exemption. For More Information For further guidance on prohibited transaction or participant investment advice rules, contact any member of the Employee Benefits & Executive Compensation practice group. Page 4 of 6

5 EMPLOYEE BENEFITS & EXECUTIVE COMPENSATION ATTORNEYS Employee Benefits & Executive Compensation Practice Group Brian M. Johnston, Chair Jamie Zveitel Kwiatek Vice Chair St. Louis Courtney M. Brunsfeld St. Louis Michael V. Conger Hannah R. DeLuca Mary K. Samsa Chicago Polsinelli Shughart PC has a deep bench of qualified Employee Benefits attorneys who cover all aspects of plan creation and design, plan compliance and executive compensation agreements. Collectively our attorneys have more than 100 years of combined employee benefits expertise, providing practical, proactive advice, while also striving to develop innovative solutions to all of your employee benefit needs. In this increasingly complex area of compliance responsibility, with a multitude of different legal requirements under the Internal Revenue Code, the Employee Retirement Income Security Act, among other state and federal mandates, the team will work with you to not only minimized the risk of problems, but to develop a strategy for success. A key to such success lies in the development of initial advisory alerts, training programs, educational campaigns and regular internal memorandums that properly outline the compliance obligations as well as the keys of the organization s successful usage of such arrangements. Polsinelli Shughart employee benefit and executive compensation attorneys practice in the following areas: Retirement plans Welfare benefit plans ERISA fiduciary duty and plan investment counseling Employee stock ownership plans ERISA and employee benefit plan litigation Executive compensation Randal L. Schultz rschultz@polsinelli.com To learn more about our services, visit us online at William P. Sweeney Chicago wsweeney@polsinelli.com Page 5 of 6

6 About Polsinelli Shughart With 570 attorneys, Polsinelli Shughart is a national law firm that is a recognized leader in the areas of business law, financial services, real estate and business litigation. Serving corporate, institutional and individual clients, Polsinelli Shughart is redefining the business of law by sharing ideas, goals and outcomes with its clients. The firm builds enduring relationships by creating value through legal services with passion, ingenuity and a sense of urgency. The firm can be found online at Polsinelli Shughart PC. In California, Polsinelli Shughart LLP. About This Publication If you know of anyone who you believe would like to receive our updates, or if you would like to be removed from our e-distribution list, please contact Therese O Shea via at toshea@polsinelli.com. Polsinelli Shughart provides this material for informational purposes only. The material provided herein is general and is not intended to be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship. Polsinelli Shughart is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and should not be based solely upon advertisements. Polsinelli Shughart PC. In California, Polsinelli Shughart LLP. Polsinelli Shughart is a registered trademark of Polsinelli Shughart PC. Page 6 of 6