BNA Pension and Benefits Blog

Not being a Washington type, I am not privy to who is lobbying for what provision in proposed legislation. After wading through the new prohibited transaction exemption which was added by the Pension Protection Act, now found in ERISA section 408(b)(14) and limited by the terms of section 408(g), I wondered who lobbied for this and how useful will it be?

The newly added section 408(b)(14) provides an exemption from the prohibited transaction provisions of section 406 for the receipt of fees or other compensation (which compensation must be reasonable) by a “fiduciary advisor” for the provision of advice or in connection with an acquisition, holding or sale of a security or other property available as an investment under the plan pursuant to the investment advice from the "fidiciary advisor".

A “fiduciary advisor” is defined as a registered investment advisor; a bank or similar financial institution referred to in section 408(b)(4) or a savings and loan association (but only if the advice is provided through a trust department of the bank or similar financial institution or savings association); an insurance company; a registered broker dealer; or an agent, employer, registered representative of any of the above. The advice must be given to a participant or beneficiary of an individual account plan who is self directing the investment.

Further, the advice must take place in the context of an “eligible investment advice arrangement”. An “eligible investment advice arrangement” requires either that any fees or other compensation received by the fiduciary advisor do not vary depending on the basis of any investment option selected or the arrangement uses a computer model under an investment advice program which meets the elements set forth in section 408(g)(3).

With respect to the computer model, in addition meeting the elements of section 408(g)(3), the computer advice program must be certified in accordance with rules established by the Secretary of Labor; the computer program must be recertified if there are material modifications; the only advice provided under the program must be the advice provided by the computer model and the transaction must occur solely at the direction of the participant or beneficiary.

The "eligible investement advice" arrangement must be expressly authorized a separate plan fiduciary other than the person offering the investment advice program; an independent auditor who has appropriate technical training or experience or proficency must audit the program annually and issue a report to the fiduciary who authorized the use of the arrangement presenting specific findings regarding compliance of the arrangement with the exemption; there are extensive disclosure rules including a model disclosure form to be provided by the Secretary of Labor for fees and other compensation; and the fiduciary advisor must acknowledge in writing its fiduciary status with respect to the plan.

While my limited intellectual capabilities cannot possibly fathom every possible prohibited transaction this exemption covers, it obviously is designed to provide some protection to plan sponsors who formally appoint fiduciary advisors to provide investment advice to participants in their 401(k) plans, where the advisor gives investment advice and takes a commission or other fee based on the investments recommended without running afoul of some of those tricky 406(b) violations lurking in a lot of 401(k) arrangements.

Will this new exemption provide a great marketing tool for the 40l(k) financial service providers?

Will it create a new niche for experts in 401(b)(14) arrangments?

Will this become the new standard for 401(k) arrangements or is it just too complex to be workable?