Compliance March 12, 2003

DoL Lowers Another Advice Barrier

December 27, 2001 (PLANSPONSOR.com)- The Department of Labor (DoL) took another step toward expanding participant advice options recently, issuing an advisory opinion that removes some of the economic barriers that have prevented some investment managers from offering the service.
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In Advisory Opinion 2001-09, the DoL found that an investment management firm could be compensated for offering investment advice on its own funds – and could receive higher fees based on participant investment decisions on that advice – subject to certain conditions. 

In so doing, the DoL appears to have set aside the standard previously outlined in the so-called Frost decision. That standard, which sanctioned advice provided from an investment management firm, provided that the manager received equal compensation, regardless of the funds recommended.

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Program Provisions

The DoL noted that asset allocation programs, such as the one contemplated by SunAmerica, while perhaps resulting in an increase in investment management fees for the provider, would not violate ERISA, since advice for individual participants would not be controlled by SunAmerica.

However, the DoL’s blessing did not come without conditions. In the SunAmerica case, the conditions included:

  • informing the plan fiduciaries choosing the program of the relationships between the parties involved
  • allowing participants to disregard the advice
  • developing asset allocation portfolios based on a methodology developed, maintained and overseen by an independent financial expert (Ibbotson in  SunAmerica’s case)
  • ensuring that the compensation of the independent financial expert is not affected by the participants’ investment decisions
  • ensuring that the computer programs used by the independent financial expert will be developed by programmers  unaffiliated with the investment manager
  • ensuring that the investment manager offering access to the advice product will have no discretion regarding the output of the program
  • developing the models in the best interests of participants and beneficiaries

In its opinion, the DoL specifically acknowledged that the portfolios might include the investment manager’s funds exclusively, depending on the fiduciary decision of the plan sponsor.

Still Backing Boehner

Under other circumstances, the advisory might be seen as mitigating the pursuit of additional legislation expanding access to participant advice, notably the Retirement Security Advice Act. It has been championed by Representative John Boehner (R-Ohio) and already approved by the House of Representatives.

However, in a statement, Ann Combs, Assistant Secretary of the DoL, noted its continued support for Representative Boehner’s bill, despite the issuance of the advisory opinion. 

Combs testified in support of the bill last July during House subcommittee hearings. Since then, it has also received the backing of the Secretaries of Commerce and Treasury, as well as the White House. 

Review the Advisory Opinion here.

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