The Department of Labor on Monday issued final rules on investment advice in 401(k) plans, largely in line with its initial definition of advice.
Defined contribution plans may offer advice from a third-party as long as that entity receives level fees regardless of their recommendations, or through a certified computer model. In both cases, the advice must use generally accepted investment theories based on historical risks and performance of different asset classes over defined periods of time.
Also, in both methods, level fees and computer models, the entity providing advice must ask investors about and take into account their: age, life expectancy, retirement age, risk tolerance and investment preferences, current investments, other assets and sources of income. Additionally, the advice may take further factors into account, such as a participant’s contribution rates and liquidity needs.
DOL reiterated that sponsors will continue to have a fiduciary duty in the selection and monitoring of an investment advisor, but are not liable for the advice provided to participants. DOL also said that IRA rollover recommendations do not constitute investment advice.
The Department of Labor estimates that before it passed the Pension Protection Act in 2006, setting additional parameters for 401(k) plans, including advice, only 40% of plans offered investment advice. Today, it estimates that between 63% and 69% of plans offer advice. It is the Department’s hope that this additional guidance will result in more prevalent “quality advice” that will help investors properly diversify and more frequently rebalance their portfolios—resulting in better preparation for retirement.
"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 DOL's Employee Benefits Security Administration Assistant Secretary Phyllis C. Borzi. "This rule will make high-quality fiduciary investment advice more accessible, while providing important safeguards to minimize potential conflicts of interest."
The rules are set to take effect in 60 days and are DOL’s second attempt to clarify the definition of investment advice. DOL first issued the definition in January 2009, only to withdraw it that following November over concerns of self-dealing by investment or financial advisers. In March 2010, DOL issued another set of updated rules on investment advice and exemptions, which received 74 comment letters.