Investment Advice Exemption
The Pension Protection Act created an investment advice prohibited transaction exemption, which reinforced previous pronouncements from the U.S. Department of Labor by providing further clarification and guidance. Thereto, such advisory services may only be provided by a “fiduciary adviser”, who is defined as:
- A registered investment adviser under the Investment Advisers Act of 1940
- A bank trust department subject to periodic examination and review by regulators
- An insurance company
- A person registered as a broker or dealer under the 1934 Securities Act
- An employee, agent, registered representative or affiliate of any of the preceding parties
The advisory services have to be provided under an “eligible investment advice arrangement” that is approved by an independent fiduciary, which is defined as:
- Provides that the fees received by the fiduciary adviser do not vary on the basis of which investment options are chosen; or
- Uses a computer model under an investment advice program meeting certain conditions, including an annual audit requirement.
In addition, there would have to be disclosures provided to participants regarding the fiduciary adviser’s fee arrangement, the adviser’s relationship with the development of any computer model, certain performance statistics and other prescribed information.
ERISA sets the standard by which all fiduciaries are measured, as being those investment decisions which a like expert, with appropriate knowledge and experience would reasonably make.
In the event that a fiduciary is not sufficiently skilled to perform the investment duties outlined in the plan's investment governance documents, they are required to engage a professional that is appropriately skilled. It is generally accepted that most fiduciaries are better suited engaging the services of a prudent expert, to assist in the ongoing management of the plan’s investments - such a professional investment advisor. As a result, this is exactly what Fi401k Advisors' Fiduciary Adviser engagements are designed to fulfill.