On October 25, 2011, the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) issued final regulations that further clarify the rules or exemptions of how fiduciary advisers provide investment advice to plan participants.
Regulations. Changes in regulations. Exemptions. What’s the fuss all about? “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,” as stated by EBSA Assistant Secretary Phyllis C. Borzi. Through all the regulations, transactions and details, the sole purpose of a retirement plan is to allow individuals to prepare for and enjoy a successful retirement.
While the industry shift from defined benefit to defined contribution plans has provided many benefits, it has also forced individuals to become professional money managers, and although education efforts help, they are not enough. The passing of the Pension Protection Act of 2006 (PPA) opens the door for fiduciary advisers to fill the void and pick up where education leaves off. The fear in the industry is that while these regulations and rules are aimed at helping individuals become retirement ready, they may inadvertently allow for advice that is not truly in the client’s best interest. To help protect consumers and ensure the advice they receive is un-conflicted, EBSA has issued the final regulations discussed below.
Under the regulations, an eligible investment advice arrangement can only be provided on a ‘level-fee’ basis or by a certified computer model. The regulation further clarifies that an adviser providing advice under the level-fee basis must base that advice on generally accepted investment theories, historical risk and return data of different asset classes over a defined period of time, take into account related investment and management fees and expenses, take into account participant information including age, risk tolerance and investment preferences and finally the fiduciary adviser’s fees may not vary based on the investment options recommended to the participant. The regulations also include several disclosure requirements and an annual independent audit of the advice service.
We believe a comprehensive participant services campaign, one that includes both education and advice, is the most effective way to prepare participants for a successful retirement. Many individuals feel confident in their retirement readiness by using ‘do it yourself’ online tools, reading education materials and attending classes; however, there are many other individuals who feel overwhelmed with the responsibility of being a professional money manager themselves and would prefer to utilize the services of a true professional.
Services like our RetireAdvisers® Plan Participant service provide a solution under the PPA approved ‘level-fee’ advice arrangement, allowing individuals the opportunity to receive help from an independent, professional retirement consultant. Effectively investing retirement plan money is one of the major factors of reaching a successful retirement. The Department of Labor’s final regulations will help plan sponsors ensure that the advice provided to their participants is truly in their best interest, and not simply in the best interest of the adviser.
