WikiLeaks Document Release
http://wikileaks.org/wiki/CRS-RS22514
February 2, 2009
Congressional Research Service
Report RS22514
Investment Advice and the Pension Protection Act of 2006
Jon O. Shimabukuro, American Law Division
March 11, 2008
Abstract. This report examines Section 601 of the Pension Protection Act of 2006, which amends the Employee
Retirement Income Security Act to allow for the provision of investment advice without fear of fiduciary liability.
Prior to the enactment of Section 601, ERISA's prohibited transaction restrictions operated to discourage
pension plan fiduciaries from providing investment advice to plan participants and beneficiaries. As amended,
ERISA would now seem to allow for the provision of investment advice so long as such advice is provided
pursuant to an eligible investment advice arrangement in compliance with the statute.
Order Code RS22514
Updated March 11, 2008
Investment Advice and the Pension
Protection Act of 2006
Jon O. Shimabukuro
Legislative Attorney
American Law Division
Summary
This report examines Section 601 of the Pension Protection Act of 2006, which
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amends the Employee Retirement Income Security Act to allow for the provision of
investment advice without fear of fiduciary liability. Prior to the enactment of Section
601, ERISA's prohibited transaction restrictions operated to discourage pension plan
fiduciaries from providing investment advice to plan participants and beneficiaries. As
amended, ERISA would now seem to allow for the provision of investment advice so
long as such advice is provided pursuant to an eligible investment advice arrangement
in compliance with the statute.
As defined contribution pension plans, which generally require a participant to direct
the investment of plan assets, have become the primary vehicles for accumulating
retirement savings, there has been greater awareness by many participants of the need for
investment advice. Section 601 of the Pension Protection Act of 2006 ("PPA") amends
the Employee Retirement Income Security Act ("ERISA" or "the act") to allow for the
provision of investment advice without fear of fiduciary liability.1 This report provides
background information on investment advice and the fiduciary responsibilities imposed
by ERISA. The report also examines Section 601 of the PPA and its amendment of
ERISA.
Background
ERISA provides a comprehensive federal scheme for the regulation of employee
pension and welfare benefit plans offered by private employers.2 Enacted in 1974, the act
1
P.L. 109-280, � 601 (2006).
2
29 U.S.C. � 1001 et seq. See 29 U.S.C. � 1002(1) (defining an "employee welfare benefit plan"
as "any plan, fund, or program ... established or maintained by an employer ... for the purpose of
providing for its participants or their beneficiaries ... medical, surgical, or hospital care or
(continued...)
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sought to eliminate the conflicting and inconsistent regulation of pension and welfare
benefit plans by various state laws.3 Such laws were believed to be inadequate in
protecting the interests of plan participants and beneficiaries.4
Prior to ERISA's enactment, there was no comprehensive regulation of the
individuals who managed plan assets and controlled the operation of employee benefit
plans. Plan fiduciaries were regulated by a combination of federal and state laws, and by
common law trust principles.5 In many instances, plan fiduciaries were able to limit their
liability by contract or were beyond the jurisdiction of a particular court.6
Under ERISA, fiduciaries must act "solely in the interest of the participants and
beneficiaries" of a plan.7 The act defines a fiduciary as someone who (1) exercises any
discretionary authority or control with respect to the management of a plan or exercises
any authority or control with respect to the management or disposition of plan assets; (2)
renders investment advice for a fee or other compensation, direct or indirect, with respect
to any moneys or other property of such plan, or has any authority or responsibility to do
so; or (3) has any discretionary authority or responsibility in the administration of a plan.8
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In addition to requiring plan fiduciaries to adhere to certain standards of conduct,
ERISA prohibits fiduciaries from engaging in specified transactions.9 For example,
Section 406(a)(1)(C) of ERISA prohibits a fiduciary from engaging in a transaction when
he knows or should know that such transaction constitutes a direct or indirect furnishing
of goods, services, or facilities between the plan and a party in interest.10 The act also
prohibits a plan fiduciary from dealing with the assets of a plan in his own interest or for
his own account.11 ERISA's prohibited transaction restrictions are believed to have
discouraged the provision of investment advice.12 Because it is perceived that "[v]irtually
2
(...continued)
benefits, or benefits in the event of sickness, accident, disability, death or unemployment....").
3
Employee Benefits Law 5 (Steven J. Sacher et al. eds., 2000).
4
Id.
5
Sacher, supra note 3, at 623.
6
Id.
7
29 U.S.C. � 1104(a)(1).
8
29 U.S.C. � 1002(21)(A).
9
29 U.S.C. � 1106 (identifying prohibited transactions between a plan and a party in interest or
fiduciary). ERISA's fiduciary duties are identified in Section 404(a)(1) of the act, 29 U.S.C. �
1104(a)(1). In general, ERISA establishes four standards of conduct for plan fiduciaries: a duty
of loyalty, a duty of prudence, a duty to diversify investments, and a duty to follow plan
documents to the extent that they comply with ERISA.
10
29 U.S.C. � 1106(a)(1)(C). See 29 U.S.C. � 1002(14) (defining a "party in interest" with
respect to an employee benefit plan to include, in part, any fiduciary, counsel, or employee of
such a plan and an employer whose employees are covered by such a plan).
11
29 U.S.C. � 1106(b).
12
See H.Rept. 107-262 pt. 1, at 12-13 (2001).
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any transaction could fall within one of these [prohibited transaction] categories,"
individuals are reluctant to provide investment advice.13
Recognizing that participants and beneficiaries may not have a sufficient
understanding of investment principles and strategies to make informed investment
decisions, the Department of Labor ("DOL") issued an interpretive bulletin in 1996 that
identified categories of information and materials that would not constitute investment
advice for purposes of ERISA's fiduciary definition.14 The interpretive bulletin discusses
the provision of investment-related educational information to participants and
beneficiaries rather than the rendering of investment advice. The interpretive bulletin
contemplates the availability of information and materials that inform a participant about
the benefits of increasing plan contributions, that discuss general financial and
investments concepts, such as diversification, that provide a participant with asset
allocation models, and that allow a participant to estimate future retirement income needs
and assess the impact of different asset allocations on retirement income.15
In 2001, DOL issued an advisory opinion that commented directly on the provision
of investment advice to participants and beneficiaries.16 In response to an application
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from SunAmerica Retirement Markets, Inc. ("SunAmerica"), a provider of financial
services, for an exemption from ERISA's prohibited transaction restrictions, DOL
considered whether SunAmerica would violate ERISA if investment advice was provided
through a program involving a computer model that applied a methodology developed,
maintained, and overseen by a financial expert who was independent of SunAmerica.17
DOL concluded that SunAmerica would act as a fiduciary only to the extent that it
was responsible for the prudent selection and periodic monitoring of its investment
advisory services. Individual investment recommendations provided or implemented
under the program, however, would not be the result of SunAmerica's exercise of
authority, control, or responsibility such that ERISA's prohibited transaction restrictions
would be violated.18
13
Id. at 12 (2001).
14
U.S. Dept. of Labor, Interpretive Bulletin 96-1; Participant Investment Education, 61 Fed. Reg.
29,586 (June 11, 1996).
15
Id.
16
U.S. Dept. of Labor, Advisory Opinion No. 2001-09A (Dec. 14, 2001), available at
[http://www.dol.gov/ebsa/programs/ori/advisory2001/2001-09A.htm] (last visited Mar. 11, 2008).
17
Under Section 408(a) of ERISA, 29 U.S.C. � 1108(a), the Secretary of Labor may grant a
conditional or unconditional exemption of any fiduciary or transaction, or class of fiduciaries or
transactions, from all or part of ERISA's prohibited transaction restrictions.
18
Advisory Opinion No. 2001-09A, supra note 16 at 6 ("Recommendations provided to, or
implemented on behalf of, participants by SunAmerica will be based solely on input of
participant information into computer programs utilizing methodologies and parameters provided
by the Financial Expert and neither SunAmerica, nor its affiliates, will be able to change or affect
the output of the computer programs. SunAmerica will exercise no discretion over the
communication to, or implementation of, investment recommendations provided under the
Program.").
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Section 601 of the PPA appears to codify many of the concepts articulated in DOL's
advisory opinion. In general, Section 601 amends Section 408 of ERISA, a section that
identifies exemptions from the act's prohibited transaction restrictions, to recognize the
permissibility of certain provisions of investment advice.
Section 601 of the Pension Protection Act of 2006
Section 408(g)(1) of ERISA, as added by Section 601(a)(2) of the PPA, states that
the act's prohibited transaction restrictions shall not apply to transactions involving
investment advice if such advice is provided by a fiduciary adviser pursuant to an
"eligible investment advice arrangement."19 An "eligible investment advice arrangement"
is defined as an arrangement that either
(1) provides that any fees (including any commission or other compensation) received
by the fiduciary adviser for investment advice or with respect to the sale, holding, or
acquisition of any security or other property for purposes of investment of plan assets
do not vary depending on the basis of any investment option selected, or
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(2) uses a computer model under an investment advice program meeting the
requirements of Section 408(g)(3) in connection with the provision of investment
advice by a fiduciary adviser to a participant or beneficiary.20
In addition, to be considered an "eligible investment advice arrangement," an
arrangement must meet other requirements identified in subsequent paragraphs of Section
408(g). These requirements include the following: the express authorization of the
arrangement by a plan fiduciary other than the person offering the investment advice
program, any person providing investment options under the plan, or any affiliate of
either; the performance of an annual audit of the arrangement by an independent auditor;
compliance with various disclosure requirements; the writing of participant notifications
in a clear and conspicuous manner; and the maintenance of any records showing
compliance with the relevant provisions of Section 408(g) for not less than six years.21
If investment advice is provided through the use of a computer model, such model
must meet certain specified requirements. Section 408(g)(3)(B) of ERISA indicates that
the computer model must
(1) apply generally accepted investment theories that take into account the historic
returns of different asset classes over defined periods of time;
(2) utilize relevant information about the participant, which may include age, life
expectancy, retirement age, risk tolerance, other assets or sources of income, and
preferences as to certain types of investments;
19
29 U.S.C. � 1108(g)(1).
20
29 U.S.C. � 1108(g)(2)(A).
21
See 29 U.S.C. � 1108(g)(2)(B) (to be an "eligible investment advice arrangement," an
arrangement must also meet the requirements of 29 U.S.C. � 1108(g)(4)-(9)).
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(3) utilize prescribed objective criteria to provide asset allocation portfolios comprised
of investment options available under the plan;
(4) operate in a manner that is not biased in favor of investments offered by the
fiduciary adviser or a person with a material affiliation or contractual relationship
with the fiduciary adviser; and
(5) take into account all investment options under the plan in specifying how a
participant's account balance should be invested and is not inappropriately weighted
with respect to any investment option.22
In addition, the computer model must be certified by an "eligible investment expert"
prior to its use and in accordance with rules prescribed by the Secretary of Labor
("Secretary").23 An "eligible investment expert" is defined by ERISA as any person who
meets requirements prescribed by the Secretary and who does not bear any material
affiliation or contractual relationship with any investment adviser, a related person
thereof, or any employee, agent, or registered representative of the investment adviser or
related person.24
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Consistent with DOL's 2001 advisory opinion, Section 408(g)(10)(B) of ERISA
provides that a plan sponsor or other person who is a fiduciary is responsible for the
prudent selection and periodic review of a fiduciary adviser who is part of an eligible
investment advice arrangement.25 However, the plan sponsor or other person who is a
fiduciary has no duty to monitor the specific investment advice given by the fiduciary
adviser to any particular recipient of the advice.26
While ERISA's new investment advice provisions have been recognized generally
as benefitting participants and beneficiaries, some in the financial services industry have
maintained that the single flat fee that is required to be an eligible investment advice
arrangement if a computer model is not used could negatively affect some money
managers.27 Although there was some discussion of amending the single flat fee
requirement, technical corrections to the PPA that were adopted during the 109th Congress
made no relevant changes.28 Moreover, legislation introduced in the 110th Congress to
22
29 U.S.C. � 1108(g)(3)(B)(i)-(v).
23
29 U.S.C. � 1108(g)(3)(C)(i).
24
29 U.S.C. � 1108(g)(3)(C)(iii).
25
29 U.S.C. � 1108(g)(10)(B).
26
Id.
27
See Doug Halonen, DC Advice Provision Challenged, Pensions and Investments, Sept. 18,
2006, at 1. According to some in the financial services industry, money managers typically
charge higher fees for some strategies than for others.
28
P.L. 109-432, � 3003(a) (2006). See Technical Corrections Pension Bill May Not Get Done
This Year, Staff Says, Pens. & Ben. Daily (BNA) No. 176 (Sept. 13, 2006).
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make additional technical corrections does not appear to include proposed amendments
to the single flat fee requirement.29
In December 2006, DOL sought information from the public to evaluate whether
there are adequate computer model investment advice programs that could be used to
provide investment advice to plan beneficiaries.30 The comments received by DOL
reportedly took differing views as to the existence of such programs.31 During an August
2007 hearing to further discuss the feasibility of computer model investment advice, some
witnesses questioned the ability of a computer program to consider the full range of
investments, including, for example, mutual funds, currency instruments, and hedge
funds.32 However, other witnesses indicated that the technology to support computer
model investment advice is available.33
In December 2007, DOL identified rulemaking related to the PPA and investment
advice as a regulatory priority.34 Although DOL indicated that a Notice of Proposed
Rulemaking would be published in December 2007, that document appears to remain
forthcoming.
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29
See, e.g., H.R. 3361, 110th Cong. (2007); S. 190, 110th Cong. (2007); S. 1974, 110th Cong.
(2007).
30
Prohibited Transaction Exemption for Provision of Investment Advice to Individual Retirement
and Similar Plans, 71 Fed. Reg. 70,427 (Dec. 4, 2006).
31
Speakers Voice Support, Opposition, Limits on Computer Model Investment Advice, Pens. &
Ben. Daily (BNA) No. 147 (Aug. 1, 2007).
32
Id.
33
Id.
34
Prohibited Transaction Exemption for Provision of Investment Advice to Participants in
Individual Account Plans (Fall 2007 Regulatory Plan), 72 Fed. Reg. 69,743, 69,878 (Dec. 10,
2007).