Retirement plan investors will save between $5 billion and $13 billion annually, thanks to new exceptions to DOL’s prohibited transaction rules, DOL estimates.
The DOL’s Employee Benefits Security Administration (EBSA) opened the door to allowing fiduciaries to offer investment advice in a final rule published to become effective Dec. 27, 2011.
DOL estimates this new rule would reduce investment mistakes, saving participants the billions of dollars indicated above.
The Department estimates that increased use of investment advice under the PPA and the final rule will reduce investment mistakes by between $7 billion and $18 billion annually at a cost of between $2 billion and $5 billion, thereby producing a net financial benefit of between $5 billion and $13 billion.
Background
Both ERISA and the Internal Revenue Code bar fiduciaries profiting from offering investment advice to investors. These prohibitions, commonly called prohibited transactions, prevent any conflicts of interest, though some critics claim they also go too far and actually narrow investors’ options to receive professional investment advice.
However, there are exemptions to these prohibited transactions. The new final rule from EBSA will allow such an exemption so that fiduciary investment advisers may be paid for recommendations if either:
- the investment advice was generated by an unbiased computer model; or
- the investment adviser is compensated on a “level-fee” basis, so he or she is paid the same regardless of the advice given.
Other conditions also apply for investment advisers to meet this exemption, which would apply to 401(k) plans and individual retirement accounts (IRAs).
In the DOL’s press release, EBSA Assistant Secretary Phyllis C. Borzi said the new rule would improve plan participants’ access to quality investment advice.
“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,” she said. “This rule will make high-quality fiduciary investments advice more accessible, while providing important safeguards to minimize potential conflicts of interest.”
EBSA’s final rule was published Oct. 24, more than a year after the proposed rule and five years after the Pension Protection Act of 2006 (PPA) amended ERISA to address the topic of fiduciary investment advice.