Investment Advice Arrangements Meet Plaintiffs' Lawyers

Written by: Nick Curabba

With so much attention being paid these days to the Department of Labor's fee disclosure initiative, it may be easy to overlook another significant piece of guidance the current Administration is attempting to finalize this year.  New regulations and a class exemption for the provision of investment advice to participants of individual account plans are currently under review by the Office of Management and Budget, and are expected to be issued in proposed form before the end of the summer.  While it is too early to know precisely what the rule and exemption will say, it is a fair bet that many investment advisers, financial consultants, and plan sponsors will be paying attention.

The regulatory guidance comes as a result of Congress enacting, as part of the Pension Protection Act of 2006, a specific provision enabling plan sponsors to provide 401(k) plan participants with access to professional investment advisers.  Before enactment of the PPA's advice provisions, parties operated in a somewhat muddled environment of informal DOL guidance, which essentially was comprised of a few advisory opinions outlining some acceptable forms of providing advice without running afoul of ERISA's prohibited transactions rules.  Since the consequence of deviating from the Department's position could have been harsh (e.g. assessment of fines and penalty taxes), however, few plan sponsors ventured to provide advice to their participants.

The PPA cleared away some of the ambiguity surrounding the provision of advice, but frankly, may have created additional confusion.  For instance, we know now that a plan sponsor can install an "eligible investment advice arrangement" for the benefit of the plan's participants.  We also know that to be an EIAA, both the plan fiduciary and the investment adviser must meet a series of conditions.  And we also know that the Department believes that advice can still be provided to plan participants under any of the models used prior to the enactment of the PPA.

What we don't know yet, and what the Department will hopefully answer in its guidance, is how a plan fiduciary can be sure it is adhering to the conditions for relief set out in the PPA.  For example, one of the ways the PPA permits advice to be given is if it is provided via an independently audited computer model.  Still unknown is the extent and method of an acceptable audit.  In addition, we do not know whether the Department will find a computer model that can be adequately used to provide advice to individual retirement account holders. 

Plan sponsors, too, will need to take a very close look at the advice regulations.  Since any EIAA must be authorized by a plan fiduciary (other than the fiduciary adviser), there will be the usual fiduciary obligation to prudently select and monitor the adviser.  Although plan sponsors will be off the hook for the result of any specific advice given and followed, they will have to be aware of the performance of the fiduciary adviser and be ready to remove the adviser if appropriate. They will also need to particularly mindful of the revenue sharing that is paid on the assets for which the advice is given.

Why does this matter? We think these new rules could open up a new avenue of litigation against plan sponsors and advisers.  Although the Department of Labor and the ERISA plaintiffs' bar have been relatively inactive in the past in bringing suits based on investment advice, the new rules about to be proposed will undoubtedly create myriad traps for unwary sponsors and advisers.  Careful analysis and planning will be required to avoid converting the best intentions of employers into another potential vehicle for ERISA litigation.