Pension Protection Act of 2006 Provides Transaction Exemption

DOL Field Bulletin answers many questions regarding investment advice to plan participants

The Pension Protection Act of 2006 (PPA) added a new statutory prohibited transaction exemption to ERISA covering investment advice to participants. While the exemption provided potential relief for situations that do not qualify under prior guidance issued by the Department of Labor (DOL), its language left open a number of questions as to how the new exemption would apply. As a result, plan sponsors and advice providers were reluctant to rely on the new exemption. On February 2, the DOL answered several of these questions in Field Assistance Bulletin No. 2007-01 (FAB 2007-01).

Status of Prior DOL Guidance on Investment Advice
The PPA states that the new exemption is not intended to alter existing individual or class prohibited transaction exemptions. However, the DOL’s primary guidance in this area consisted of interpretations and advice, not prohibited transaction exemptions. The legislative history of the PPA includes a statement that Congress intended to keep the DOL’s prior guidance on investment advice intact, but the statutory language does not address the status of guidance other than prohibited transaction exemptions. 

FAB 2007-01 makes it clear that the PPA exemption does not alter ERISA’s existing framework for determining fiduciary status or recast otherwise permissible forms of investment advice as prohibited transactions. The DOL states that the new exemption does not invalidate or otherwise affect its prior guidance on investment advice, which continues to represent its views. Under FAB 2007-01 such prior guidance includes:

• Interpretive Bulletin 96-1 (regarding investment education and advice),
• Advisory Opinions 97-15A and 2005-10A (relating to investment fees) and
• Advisory Opinion 2001-09A (the Sun-America letter outlining an acceptable investment advice arrangement).

Standards for Selecting and Monitoring an Advice Provider
Because the PPA exemption only applies to an investment advice program that qualifies as an “eligible investment advice arrangement” under the statute, some plan sponsors and fiduciaries have been concerned that the standard of care may have changed for a fiduciary that selects an advice provider for another type of arrangement. In FAB 2007-01, the DOL states that the same fiduciary duties and responsibilities apply to the selection and monitoring of an investment advisor to participants regardless of whether or not the investment advice program qualifies as an eligible investment advice arrangement. It bases this conclusion on the fact that under the statute, any eligible investment advice arrangement is subject to the fiduciary’s duty to select and review the advice fiduciary prudently, consistent with the principles stated in Interpretative Bulletin 96-1. 

The DOL extends this analysis to take the position that the section of the PPA exemption providing that plan fiduciaries have no duty to monitor the specific advice given by the fiduciary advisor to any particular participant also applies to advice programs established outside the terms of the exemption. Accordingly, under FAB 2007-01, any plan sponsor or other fiduciary that prudently selects and monitors an investment advice provider will not be liable for the advice the provider gives to individual plan participants, regardless of whether or not that advice is provided through an eligible investment advice arrangement. 

FAB 2007-01 also lists the following requirements for a prudent process for selecting and monitoring an investment advice provider:

• It must be objective and designed to elicit the information necessary to assess:
  • the provider’s qualifications;
  • the quality of services offered; and
  • the reasonableness of the fees charged for the advice.
• It must avoid self-dealing, conflicts of interest, or other improper influence.

It must take into account:

• the experience and qualifications of the investment advisor, including the advisor’s registration in accordance with applicable federal and/or state securities law;
• the advisor’s willingness to assume fiduciary status and responsibility under ERISA with respect to the advice provided to participants; and
• the extent to which the advice will be based upon generally accepted investment theories.

In monitoring investment advisors, the plan fiduciary should:

• Periodically review the extent to which there have been any changes in the information that served as the basis for the initial selection, including whether the advisor continues to meet applicable federal and state securities law requirements, and whether the advice being provided to participants and beneficiaries is based upon generally accepted investment theories; and
• Take into account the following:
  • the extent to which the provider is complying with the contractual provisions of the engagement;
  • the utilization of the investment advice services by participants in relation to the costs of the service to the plan; and
  • any participant comments and complaints.

FAB 2007-01 also states that the provisions of the PPA exemption regarding the use of plan assets to pay reasonable expenses of providing advice services are consistent with the DOL’s position in Interpretive Bulletin 96-1, provided that the service provider is selected and monitored prudently. Accordingly, plan assets may be used to pay these costs regardless of whether the advice is provided under the PPA exemption or the DOL’s prior guidance.

Application of the Level Fee Requirement
The PPA exemption requires that fees (including any commission or other compensation) received by the fiduciary advisor do not vary depending on the basis of the investment option selected. It was not clear under the statute if this level fee requirement extended to the fees paid to affiliates of the investment advisor. FAB 2007-01 states that the level fee requirement for an eligible investment advice arrangement applies to the fiduciary advisor, not its affiliates, unless the affiliate is providing investment advice to participants. 

The DOL noted that under its prior guidance, if the fees and compensation received by the affiliate of a fiduciary providing investment advice do not vary or are offset against those received by the fiduciary for the provision of investment advice, no prohibited transaction results and there is no need for an exemption. As a result, the DOL concluded that Congress did not intend for the level fee requirement to extend to affiliates of the fiduciary advisor unless the affiliate is also an advice provider to the plan participants. However, FAB 2007-01 also states that under an eligible investment advice arrangement, when an individual acts as an employee, agent or registered representative on behalf of an investment advice provider, the individual as well as the entity must be treated as the fiduciary advisor for purposes of the level fee requirement.