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Plan Investment Advisor Rules Increase Employer Obligations

MSK Client Alert
February 2007

For the first time this year, retirement plans fiduciaries can provide investment advice to participants and get an additional fee for doing so. Plan sponsors and fiduciaries that want to offer this service will have to satisfy new rules enacted as part of the Pension Protection Act of 2006 and Department of Labor guidance issued earlier this month. Prior to 2007, the provision of such advice for an additional advisory fee by a plan fiduciary would have resulted in a prohibited transaction under ERISA and the Internal Revenue Code.

Plan sponsors generally will not be liable for the advice offered to the participants; however, plan sponsors (or some other fiduciary appointed by them) will have substantial responsibility with respect to the appointment of the investment advisor and ongoing monitoring of its services. It is unclear just yet to what extent plans will offer this service. In some cases, plan sponsors may feel that the obligations associated with appointing and monitoring the investment advice provider are too onerous and decide not to offer the service.


In recent years, it has become increasingly common for individual account plans, such as 401(k) plans, to provide participants with a choice of investment options and leave it to the participant to determine how his or her account is invested. Although these investment decisions will have a major impact on the amount of retirement income participants will receive, many plan participants lack the knowledge necessary to make informed decisions. As a result, employers and financial services companies that act as the plan fiduciaries sought changes in the law so that greater levels of investment advice could be provided to plan participants.

New law

Under the new law, a fiduciary investment advisor can receive an additional fee for providing investment advice to participants as to the allocation of his or her plan contributions among different investment options provided certain requirements are met including the following:

Obligations of plan sponsors

This last requirement warrants special attention from plan sponsors, which in most cases will be doing the appointing and monitoring, and was fleshed out in the recent guidance from the DOL.

Plans are not required to offer these investment advice services. If the plan sponsor wishes to offer the service, the plan sponsor must prudently select and monitor the investment advice provider in order for the plan sponsor to avoid being liable for the advice provided. In making the decision whether this is a service they wish to offer to plan participants, plan sponsors should take into account their ongoing obligations with respect to appointment and monitoring of these advisors. (Although plan sponsors can designate other fiduciaries to handle the selection and monitoring process, in most cases the plan sponsor will bear this responsibility. Therefore, when I refer to the obligations of the plan sponsor below, I am also including the obligations of any fiduciary appointed by the plan sponsor to carry out these functions.)

The DOL prescribes the following process for the appointment of the investment advice provider: 

Then, as part of the ongoing monitoring process: 

The selection and monitoring of advisors providing investment advice to participants will require procedures on the part of plan sponsors to assure that the above requirements are satisfied. Plan sponsors will have to determine whether the burdens of these procedures are worth the possible benefits to plan participants.

For more information, please contact Robert J. Lowe at or at (310) 312-3180. Robert is a partner at Mitchell Silberberg & Knupp LLP in the employee benefits and executive compensation practice area.


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