Prepared By: Eugene A.
Ferreri, Jr.
First Citizens Bank
Raleigh, North Carolina
In November of 2001, the House of Representatives passed the "Retirement Security Advice Act of 2001" (H.R. 2269) and sent it to the Senate. The bill makes changes to the prohibited transactions rules in both the Internal Revenue Code and ERISA. The reason for the legislation is to meet a perceived need for high quality investment advice for participants in qualified plans that permit participant direction of investment. The bill creates an exemption from the prohibited transaction rules for services provided by advisers subject to the following rules. It would protect plan sponsors and other fiduciaries that arrange for the provision of such advice.
The bill would require “fiduciary advisers” to make certain disclosures to plan participants who make use of their services. These disclosures would include:
§ The fees charged by the adviser
§ Any material affiliations or contractual relationships with any security or other property that the adviser has to alert the participant of any potential conflicts of interest.
§ Any limitations on the scope of the advice
§ The types of services provided
§ The fact that the adviser is a fiduciary of the plan
§ Any information required to be disclosed under securities laws with respect to the purchase, sale or holding of any security
The disclosures need to be made in a clear and conspicuous manner and in a way that would be understood by the average plan participant. They should also be made contemporaneously with the initial advice provided.
The exemptions in the bill would permit for plans that give participants the right to direct investment:
§ The giving of investment advice to a plan, its participants and beneficiaries
§ The sale, acquisition, or holding of a security or other property pursuant to the investment advice; and
§ The direct or indirect receipt of fees for the advice
The bill would apply only to by "fiduciary advisers" such as registered investment advisors, banks, insurance companies, or registered broker dealers.
In order for the exemption to apply, the transactions must be made under terms that are at least as favorable to the plan as an arm's-length transaction. The fees received by the adviser must be reasonable.
The adviser must comply with a 6-year record-keeping requirement. If a plan sponsor chooses the adviser for participants and beneficiaries, it would not have to monitor the specific investment advice given, but would have a duty to make a prudent selection and conduct a periodic review of the adviser.