|
 Printer Friendly Version • PDF Version
This report regarding the availability of computer
model investment advice programs for an Individual Retirement Account or
similar plan (hereinafter, an IRA) is being submitted to the House of
Representatives Committee on Ways and Means, the House of Representatives
Committee on Education and Labor, the Senate Committee on Finance, and the
Senate Committee on Health, Education, Labor and Pensions pursuant to
section 601(b)(3)(B) of the Pension Protection Act of 2006 (the PPA),
Public Law 109-280, 120 Stat. 965.
Section 601(b) of the PPA amended the Internal Revenue
Code of 1986 (the Code) by adding an exemption for certain transactions in
connection with the provision of investment advice to a participant or
beneficiary of a plan as defined in IRC section 4975(e)(1), including an
IRA, if the investment advice is provided under an “eligible investment
advice arrangement.”(1) In particular, the investment advice must be
provided under an arrangement which either: (1) provides that any fees
received by the fiduciary adviser for investment advice or in connection
with the investment of plan assets do not vary on the basis of any
investment option selected; or (2) uses a computer model under an
investment advice program meeting the requirements of the exemption.(2)
This exemption, however, does not cover the use of
computer model investment advice programs to provide investment advice
with respect to IRAs until the Secretary of Labor, in consultation with
the Secretary of the Treasury, determines whether there is any computer
model investment advice program which may be utilized by an IRA.(3) Such an
advice program must: (1) utilize relevant information about the account
beneficiary, which may include age, life expectancy, retirement age, risk
tolerance, other assets or sources of income, and preferences as to
certain types of investments; (2) take into account the full range of
investments, including equities and bonds, in determining the options for
the investment portfolios of the account beneficiary; and (3) allow the
account beneficiary, in directing the investment of assets, sufficient
flexibility in obtaining advice to evaluate and select investment options.(4)
The PPA requires that such feasibility determination be
based on a solicitation of information by the Secretary of Labor,
including a solicitation from: (1) the "top 50 trustees" of IRAs
and similar plans, determined on the basis of assets held by such
trustees; and (2) other persons offering computer model investment advice
programs based on nonproprietary products.(5) The PPA further provides that
the Secretary of Labor shall report the results of such determination to
the Committee on Ways and Means and the Committee on Education and the
Workforce(6) of the House of Representatives and the Committee on Finance and
the Committee on Health, Education, Labor, and Pensions of the Senate no
later than December 31, 2007.(7)
Pursuant to the requirements of the PPA, the Department
of Labor (the Department) published on December 4, 2006 a Request For
Information in the Federal Register regarding the feasibility of computer
model investment advice programs for IRAs (71 FR 70427).
Contemporaneously, as required by the PPA, the Department directly
solicited comments, by mail, from: (1) the "top 50" trustees of
IRAs and similar plans; and (2) persons who offer computer model
investment advice programs. The Department received 62 written comments.
On July 31, 2007, the Department held a public hearing to gather
additional information regarding computer model investment advice
programs. Thirteen commenters testified at the public hearing. All of the
written comments, and a transcript of the hearing, were posted on, and are
available at, www.regulations.gov.
Written and/or oral comments were received from various
segments of the financial services industry. Many of the nation's largest
trustees, investment advisers, insurance companies, banks, custodians,
broker-dealers, and computer modelers supplied information. Collectively,
the commenters provide services to employee benefit plans that, in the
aggregate, represent tens of millions of participants and trillions of
dollars in assets.
Four commenters (the Four Commenters) identified
existing computer model investment advice programs that, in their view,
meet all three of the criteria set forth in section 601(b)(3)(B) of the
PPA.(8) Each of the Four Commenters identified a different model. These and
other comments are further discussed below.
Regarding the first PPA criterion that a computer model
investment advice program utilize relevant information about an account
beneficiary (as described in section 601(b)(3)(B)(i) of the PPA), each of
the Four Commenters stated that the existing program it identified
currently utilizes an account beneficiary's age, retirement age, risk
tolerance, other assets or sources of income, and preferences as to
certain types of investments in formulating the advice provided to the
account beneficiary. Many other commenters stated generally that computer
models are capable of utilizing relevant information about an account
beneficiary. No commenters took a contrary view on this point.
Some commenters interpreted the second PPA criterion,
that a computer model "tak(e) into account the full range of
investments, including equities and bonds” (as described in PPA section
601(b)(3)(B)(ii) of the PPA), as requiring that the computer model address
all of the generally recognized asset classes in determining the
recommended asset mix for the account beneficiary's investment portfolio.
Others read this criterion as requiring that the computer model address
the entire universe of financial instruments (i.e., every stock, bond,
swap, etc.) available for investment by an IRA. Most commenters indicated
that no computer model programs exist that can take into account the
entire universe of financial instruments that may be available to IRAs and
no commenters disputed this contention. The Department believes that a
computer model investment advice program satisfies section 601(b)(3)(B)(ii)
of the PPA if it takes into account all of the generally recognized asset
classes that are necessary for an account beneficiary to construct a
diversified investment portfolio. This interpretation is consistent with
the intent of the statutory exemption, which is to provide IRA
beneficiaries with greater access to investment advice from computer model
investment advice programs, where such programs are capable of narrowing
the universe of investments into an appropriate mix of investment options.
Each of the Four Commenters stated that the existing
computer model program it had identified takes into account a broad range
of mutual funds that collectively represent all of the major asset
classes. Other commenters further identified or described existing
computer models that, in addition to modeling the major asset classes,
take into account a beneficiary's "outside" investments (e.g.,
spousal assets). Many commenters stated generally that computer model
investment advice programs are capable of taking into account all of the
major asset classes.
With respect to a computer model's ability to allow an
account beneficiary sufficient flexibility in obtaining advice to evaluate
and select investment options (as described in section 601(b)(3)(B)(iii)
of the PPA), each of the Four Commenters stated that the computer model
program it had identified currently permits an account beneficiary to: (1)
change the information inputted by the account beneficiary into the model,
which necessarily changes the model’s output; (2) bypass, in whole or in
part, the model's advice; and/or (3) seek other advice. Numerous other
commenters represented generally that computer models are capable of
providing account beneficiaries with sufficient flexibility in obtaining
investment advice. Several of these commenters clarified that account
beneficiaries may not change the computer models themselves (i.e., the
internal computer coding of the models).
Based upon the comments received by the Department and
the public hearing testimony, and after consultation with the Secretary of
the Treasury, the Secretary has determined that there are computer model
investment advice programs which meet all the criteria set forth in
section 601(b)(3)(B) of the PPA. Specifically, the Secretary has
identified computer models that: (1) utilize relevant information about
the account beneficiary; (2) take into account the full range of
investments, including equities and bonds, in determining the options for
the investment portfolio of the account beneficiary; and (3) allow the
account beneficiary sufficient flexibility in obtaining advice to evaluate
and select investment options. As noted in section 601(b)(3)(C)(i)(II) of
the PPA, this determination by the Secretary lifts the restriction in
section 601(b)(3)(C)(i)(I) on the availability of the statutory exemption
for the provision of computer model investment advice to IRAs, as of this
date.
We further note that, during the Department's
consideration of this matter, it became aware of investment advice
arrangements that, while not covered by the new statutory exemption, may
be beneficial to participants and beneficiaries of individual account
plans and IRAs. To assure that plan participants and IRA beneficiaries may
have access to these investment advice programs, the Department has under
consideration an administrative class exemption from the prohibited
transaction provisions of ERISA and the Code for certain additional
investment advice arrangements pursuant to its authority under section
408(a) of ERISA and section 4975(c)(2) of the Code. The proposed class
exemption will be published in the August 22, 2008 issue of the Federal
Register. Comments received in connection therewith will be posted on, and
will be available at www.regulations.gov.
August 21, 2008
-
IRC section 4975(d)(17).
-
Section 601(a) of the PPA added a
parallel provision to the Employee Retirement Income Security Act of
1974 (ERISA) for transactions involving an individual account plan
covered by Title I of ERISA. See ERISA section 408(b)(14).
-
PPA section 601(b)(3)(C)(i). This
restriction does not affect the availability of the exemption to an
IRA of an eligible investment advice arrangement that satisfies Code
section 4975(f)(8)(B)(i)(I)(describing an arrangement under which fees
do not vary). Further, there is no comparable limitation with respect
to the application of sections 408(b)(14) and 408(g) of ERISA. In this
regard, the Department notes that IRAs are generally not subject to
the provisions of Title I of ERISA. See 29 CFR Sec. 2510.3-2(d).
-
PPA section 601(b)(3)(B)(i)-(iii).
-
PPA section 601(b)(3)(A)(i).
-
The House of Representatives
Committee on Education and the Workforce was renamed the Committee on
Education and Labor in the 110th Congress.
-
PPA section 601(b)(3)(B).
-
The Four Commenters are: (1)
Financial Engines, Inc.; (2) Metropolitan Life Insurance Company; (3)
Morningstar Associates, LLC; and (4) Vanguard.
|
