Trust Updates Archive
(Feb. 5, 2009--Chicago, IL) -- The U.S. Department of Labor has re-opened the comment period on its "final rule" granting fiduciaries a safe harbor when providing investment advice to 401(k) participants and IRA beneficiaries.
Under an Obama executive order, the implementation of all Bush Administration rules that had not been published by January 20 were postponed60 days. The DOL published the final rule on January 21, the effective date moves from March 23 to May 22. However, by opening the comment period and with a new Administration, the final rule is expected to be revised.
Prior to the postponement, Congress George Miller (D-Calif.), chairman of the House Education and Labor Committee, had threatened to block the final rule.
In the absence of rule granting a safe harbor, fiduciaries of ERISA-governed plans are prohibited from rendering investment advice to plan participants if they receive fees from any investment they recommend.
The DOL's rule would allow mutual funds and their investment advisers to offer investment advice to plan participants.
While most of the compliance burden under the DOL's rule falls on the providers of investment advice, plan sponsors have the task of prudently selecting and monitoring the investment advisers they chose for the plan.
The Pension Protection Act amended ERISA, adding a prohibited transaction exemption that allows greater flexibility for participants of 401(k) plans and IRAs to obtain investment advice. One of the ways in which investment advice may be given under the exemption is through the use of a computer model certified as unbiased; the other is through an adviser compensated on a "level-fee" basis. Several other requirements also must be satisfied, including disclosure of fees the adviser is to receive.
The DOL's rule provides general guidance on the exemption's requirements, including computer model certification, and includes a nonmandatory model form that advisers can use to satisfy the exemption's fee disclosure requirement. The rule also provides a class exemption that permits advisers to provide individualized advice to a worker after giving advice generated by use of a computer model.
House minority leader John Boehner (R-Ohio) called the DOL rule a “major step toward giving workers personally tailored advice.”
George Miller (D-Cal.), chairman, House Education and Labor Committee, sees it differently. “The rules proposed are nothing more than a boon for Wall Street and corporate executives." In August 2008, when the DOL issued its proposal, Miller urged the agency to immediately withdraw it, calling it harmful to plan participants.
Comments by industry observers are equally mixed. One pension attorney finds the DOL proposal naïve, suggesting sales bonuses will drive mutual fund employees to skirt or ignore compliance obligations. Others argue that the DOL has drafted well-balanced rules that adequately address conflicts of interest concerns.
The proposed rule when issued in August was sufficiently confusing that the agency on September 25 offered a free Web seminar to address questions and concerns.
To view the DOL rule published on January 21 Click Here .
To comment on the rule Click Here and enter Regulatory Identifier Number (RIN) 1210-AB13.
For more on this topic, see the upcoming issue of Trust Regulatory News.
No statement in this issue is offered as or should be
construed as legal opinion or advice.
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