July 1, 2008

Future DOL Guidance

The DOL has said that we can expect two new pieces of guidance in the near future. Both will impact how plans are operated and, more particularly, may affect participant investment decisions. Once that guidance is final, plan sponsors will be required to provide participants with specified investment information and may offer participants new investment advisory services.

The first proposal will pave the way for fiduciary investment advice for participants. The Pension Protection Act (“PPA”) created the concept of a “fiduciary adviser” for participants. The purpose was to increase the use of investment advisory services for participants. That objective will be accomplished through an exception to the prohibited transaction rules which would allow potentially conflicted advice by broker-dealers and by plan providers (e.g., recordkeepers that are affiliated with a mutual fund management company). The advice would be considered to be “potentially conflicted” because, in both cases, the provider of the advice, or an affiliate, could end up with increased revenues if the advice favored investments or services that paid money to the adviser or an affiliate (for example, investment management fees or commissions).

The PPA will permit advice under those potentially conflicted circumstances if certain safeguards are followed. The purpose of the new guidance is to provide additional details on the safeguards.

On May 30th, the DOL forwarded its proposal to the Office of Management and Budget (“OMB”) for review and approval. The OMB has up to 90 days to act on the proposal. Most likely, the OMB will complete its process before that deadline and, as a result, the proposed regulation could be released to the public as early as 30 to 45 days from now.

The second proposal is a regulatory definition of the information that must be provided to participants concerning plan fees. As background, there is virtually no requirement in the law that participants be told anything about plan fees. (While ERISA does not have any fee disclosure requirements for participants, plans that invest directly in mutual funds must provide prospectuses to the participants who invest in those funds.) However, as a practical matter, most plan sponsors and providers give participants information about, at the least, the expense ratios of the investments offered by the plan.

Consistent with the current focus on fees and expenses—including the class action litigation which concerns, among other things, the information that should be provided to participants, the DOL is providing guidance in this area. (With the advantage of hindsight, it seems remarkable that the DOL is just now getting around to addressing that issue in an authoritative way.) In addition, several Congressional committees are considering the information that should be disclosed to participants on fees and expenses and a bill on that subject has been approved by the House Education and Labor Committee.

We understand that the disclosure requirements will be in the form of a proposed regulation under the fiduciary rules in 404(a) of ERISA. In the past, there have been some disclosure standards under 404(c) of ERISA, but plan fiduciaries were not required to comply with those provisions. Instead, 404(c) offers a fiduciary “safe harbor” if a plan complies. However, the new rules will be mandatory, which means that plan sponsors will have to provide the required information to participants—and, therefore, that providers will have to assist in that process.

At this point, there is no reason to believe that either of the proposals will contain controversial provisions. In fact, we believe that many plan sponsors and most of the major providers are already providing the information that will be required. However, we suspect that “the devil will be in the details.” That is, we suspect that some of the specific provisions may be objectionable to some plan sponsors and some providers. But, that remains to be seen.

When you combine those two new proposals with the finalization of the disclosure rules under ERISA section 408(b)(2), the second half of this year promises to be, as they say, “interesting.”


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Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.

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