The program complies with Section 4975 of the Internal Revenue Code and Section 408(g) of ERISA as required for all advisers to participants in IRA and 401(k) plans, according to a press release. The DALBAR Audit was first introduced in 2007 to comply with the Department of Labor FAB 2007-01 that applied to level fee arrangements.
The new regulation governs IRA and 401(k) advisers who do not qualify under the level fee structure who can continue to earn commissions and 12b-1 fees but are subject to an annual audit for compliance with ERISA 408(g), DALBAR said.
According to the press release, the DALBAR Adviser Audit consists of two components:
- Pre-audit: Prepares the fiduciary adviser for the formal audit. The purpose of the pre-audit is to reduce the likelihood of encountering problems during the statutory annual audit. The pre-audit permits deficiencies to be corrected before it is necessary to publish reports. The pre-audit takes place at the start of an engagement with continuous monitoring thereafter. The pre-audit consists of a review of practices, procedures, systems and documents; background checks of individuals who advise clients, verification of their qualifications and knowledge of regulations; and ongoing monitoring through a service/complaint line.
- 408(g) Audit: Produces published audit reports. The annual 408(g) audit evaluates compliance with ERISA Section 408(g) and related regulations promulgated by the Department of Labor. The scope and procedures used in this audit are described in DALBAR’s 408(g) Audit Proposal. The results of the 408(g) audit are presented in two reports. The first is a management letter advising the fiduciary adviser of any potential issues that should be addressed. The second is the audit report that is also delivered to all plan sponsors under agreement for fiduciary adviser services.
DALBAR said that under the new advice regulation advisers with IRA or 401(k) participant clients are required to revise current practices in a number of areas, including:
- Each adviser must be free of any potential conflicts of interest, earn only level fees, use a certified computer model to create investment recommendations, or use an “off model” process defined in the regulation.
- Each adviser must have a written agreement with the fiduciary client, described as an eligible investment advice arrangement (EIAA). The EIAA must contain specific representations, including a fiduciary statement, details of fees and compensation, affiliations and services to be rendered.
- Each Fiduciary Client must receive prescribed disclosures each year including any updates to information provided in the EIAA.
- Advisers providing “off model” advice to a fiduciary client must document the basis of any such advice and include the reasons for any deviation from advice generated by the computer model or asset allocation portfolio.
- Fiduciary adviser firms must adopt and follow written policies and procedures designed to assure compliance with the conditions of the regulation.
- Each adviser must undergo an annual 408g Audit that evaluates the adviser’s compliance with the EIAA as well as the adequacy of its own policies and procedures.
The Department of Labor’s final rule on investment advice will be published in the January 21 edition of the Federal Register (see “DoL Finalizes Investment Advice Rule“).
More information about DALBAR’s audit program is available at www.dalbar.com.