EBSA Aims to Improve Access to Unbiased Advice

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) issued a final regulation regarding a new prohibited transaction exemption.

The new regulation implements an exemption that Congress enacted as part of the Pension Protection Act of 2006 (PPA) to improve participant access to fiduciary investment advice, which contains certain safeguards and conditions to prevent investment advisers from providing biased advice that is not in a participant’s best interest.   

To qualify for the exemption in the final regulation, investment advice must be given through the use of a computer model that is certified as unbiased by an independent expert or through an adviser compensated on a “level-fee” basis, meaning that the fees do not vary based on investments selected.  Both types of arrangements must also satisfy several other conditions, including the disclosure of the adviser’s fees and an annual audit of the arrangement for compliance with the regulation.

“Given the rise in participation in 401(k)-type plans and IRAs, the retirement security of millions of America’s workers increasingly depends on their investment decisions,” said Phyllis Borzi, EBSA Assistant Secretary. “This rule will make high-quality fiduciary investment advice more accessible, while providing important safeguards to minimize potential conflicts of interest.”

On a conference call with the press, Borzi explained that the auditor must be independent from the service provider, but that EBSA did not specify all the criteria for who the auditor should be. Their role will not be to decide the investment policy of a plan (getting into the “active versus passive” debate), but solely to determine if the investment model is unbiased; does it match up with generally accepted investment principles, she said.

The prohibited transaction rules in ERISA and the IRC generally prevent a fiduciary investment adviser from recommending plan investment options if the adviser receives additional fees from the investment providers. Although these rules protect participants from conflicts of interest, ERISA provides exemptions from the rules in appropriate circumstances and permits the department to grant exemptions that have participant-protective conditions.

An EBSA analysis found that investment mistakes are projected to be reduced by $7-$18 billion annually; with a cost between $2-$5 billion, making the net benefit between $5-$13 billion. 

This regulation is separate from and does not affect the Labor Department’s proposed rule on the definition of fiduciary investment advice, which the department recently announced that it will re-propose (see “EBSA to Re-Propose Definition of Fiduciary Rule”). 

The regulation will be published in the Oct. 25 Federal Register and can be viewed at http://s.dol.gov/J4.