On October 25, 2011, the Department of Labor (DOL) released its final rules related to the provision of Investment Advice under the Pension Protection Act (PPA) of …wait, here it comes… 2006, that pre-financial-crisis, almost-forgotten law. Now, you may be asking: Why write about a DOL ruling when the DOL regulates advice in retirement plans that fall under the Employee Retirement Income Security Act (ERISA)? Well, the reason is because the DOL also happens to regulate “prohibited transactions" on Individual Retirement Accounts (IRAs).
This is where some of the confusion begins. Based on some comments I have read in the industry press, it seems many people in the advisory business believe that the DOL is muscling in on IRAs for the first time. However, that is not the case. If you go back and read any of the DOL’s past rulings on investment advice, such as the SunAmerica Advisory Opinion, they almost always mention that these rulings apply to IRAs as well as ERISA accounts when the advice is provided by a fiduciary.
Some of the confusion stems from the fact that the regulations can be challenging to read and decipher. For example: “The Department did not receive any substantive comments with respect to paragraphs (b)(4)(i)(D), (b)(4)(i)(E)(1)and (2) and therefore is adopting these provisions as proposed, now at paragraphs (b)(4)(i)(E),(b)(4)(i)(F)(1) and (2) of the final rule.“ I have spent a fair bit of time combing through industry regulations and these are as perplexing as they get.
Confusing or not, the regulations are important and advisors should carefully review them with their compliance teams. The regulations are targeted at providing two additional means to avoid prohibited transactions on retirement accounts: a computer model method and fee leveling method.
These regulations are additive to current prohibited transaction relief. In other words, if you are using prior relief such the SunAmerica Opinion to avoid prohibited transactions in your IRA accounts, then you may continue using that approach. However, this is a good opportunity for financial advisors to review their current advisory programs that include IRAs to ensure that they are in compliance with the DOL standards around prohibited transactions. In addition, financial advisors should pay special attention to forthcoming DOL regulations that may expand the definition of fiduciary for purposes of these rules.