Pension Protection Act of 2006 Prohibited Transaction Exemption Rules for "Fiduciary Advisors" to Provide Investment Advice
Rev. 08/17/06, E-mail Alert 2006-17

One of the most often-heard comments from plan participants about retirement plan investing is that they need more in the way of investment advice. Until the Pension Protection Act of 2006 (PPA), plan service providers and plan sponsors have been reluctant to provide full advice due to concerns and uncertainties about fiduciary liability that would be incurred by giving that advice. For example, one of the biggest problems for employers wishing to adopt automatic enrollment provisions but preserve 404(c) protections has been the issue of default investments of those amounts. That has been addressed in this new law.

Section 601 of the new law permits retirement plan service providers who offer investments to participant-directed plans (“fiduciary advisers”) to provide investment advice, and, if warranted, recommend their own funds without violating fiduciary rules. In general, PPA grants prohibited transaction exemptions for advice provided under an “eligible investment advice arrangement” after December 31, 2006.

Even with this change, plan sponsors and other fiduciaries retain responsibility for prudent selection of investments and periodic review of the fiduciary adviser that provides the advice.

To qualify for this relief, an “eligible investment advice arrangement” would either have to make the adviser’s fees “neutral” (meaning that the fees do not vary on the basis of which investment options are chosen) or use an unbiased computer model certified by an independent expert to create a recommended portfolio for a participant’s consideration. (The computer based modeling in PPA is similar to that described in the Advisory Opinion Letter 2001-09A that was issued to SunAmerica.)

Before investment advice may be given, the fiduciary adviser must provide a written notice (on paper or electronically) that contains specified information, including the role of any related party in developing the advice program or selecting investment options, past performance and rates of return for each of the plan’s investment options, and any fees or other compensation to be received by the fiduciary adviser. The fiduciary advisor must maintain records of evidence of compliance with the rules for 6 years.

For these purposes, “fiduciary advisor”, with respect to a plan, is a person who is a fiduciary of the plan by reason of the rendering of investment advice by that person to a plan participant or beneficiary. In addition, the "fiduciary advisor" must be:

1. registered as an investment advisor under the Investment Advisers Act of 1940 or under the laws of the State in which the fiduciary maintains its principal office and place of business,
   
2. a bank or similar financial institution referred to in section 408(b)(4) or a savings association, but only if the advice is provided through a trust department of the bank or similar institution or savings association which is subject to periodic examination and review by Federal or State banking authorities,
   
3. an insurance company qualified to do business under the laws of a State,
   
4. a person registered as a broker or dealer under the Securities Exchange Act of 1934,
   
5. an affiliate of a person in 1 through 4 above, or
   
6. an employee, agent or registered representative of a person in 1 to 5 above who satisfies the requirements of applicable insurance, banking and securities laws relating to the provision of advice.
   

A person who develops the computer model or markets the investment advice program or computer model will also be treated as a plan fiduciary by reason of the rendering of investment advice to the participant or beneficiary and is a fiduciary advisor. However, PPA empowers the Secretary of Labor to prescribe rules under which only one fiduciary advisor may elect to be treated as a fiduciary under the plan.

"Eligible investment advice arrangements" will be required to comply with a new annual independent compliance audit for years beginning in 2007. This requirement, which is unrelated to the Form 5500 independent audit, requires an audit report to be provided to the fiduciary that authorized the arrangement.

Plan assets may be used to pay reasonable expenses involved in providing investment advice under this section.

Note that investment advisers for IRAs and similar accounts (e.g., Health Savings Accounts) may only use the “neutral fee” qualification requirement for an eligible investment advice arrangement. The government will conduct a feasibility study to determine if a computer model exists that could allow IRA advisors to use the certified computer model alternative.

Bill Grossman, QPA