A New Approach to Third-Party Advice
Aon Hewitt research finds that 24% of sponsors surveyed already offer in-person, third-party investment advisory services, while another 23% are very or somewhat likely to start at some point this year. Thirty-nine percent offer phone access to third-party investment advice; 26% are very or somewhat likely to begin this year. And 39% offer participants online third-party advice, with 26% very or somewhat likely to add it this year.
And sponsors may soon see new third-party advice offerings surface. In October 2011, the U.S. Department of Labor (DOL) released its final regulations on a prohibited-transaction exemption for providing participant investment advice, enacted as part of the Pension Protection Act (PPA). In recent years, much third-party advice has been in accordance with the 2001 Labor Department advisory opinion to SunAmerica Retirement Markets Inc.
That can still happen. “The Sun-America ruling is still valid,” says Mark Smith, a Washington, D.C.-based partner at law firm Sutherland Asbill & Brennan LLP. “The DOL has specifically said that all the guidance previously available to deal with prohibited transactions in participant advice still is valid. SunAmerica, in practice, has been a very successful track.”
The SunAmerica and new DOL tracks differ somewhat. “SunAmerica is, in some ways, more expansive than the DOL regs under ERISA section 408(b)(14), because the SunAmerica opinion covers advice on both a discretionary and nondiscretionary basis,” says Craig Bitman, a New York-based partner at law firm Morgan, Lewis & Bockius LLP. Under the new regulations, a computer model giving investment advice cannot automatically invest people. “Under SunAmerica, plans can have more of a managed account, where an adviser can provide advice and execute all necessary trades for you,” he says.
The DOL regulations do offer new opportunities to give participant advice, particularly for advisers working for investment providers or broker/dealers. “You need a separately incorporated advice entity, and that entity or the adviser cannot receive compensation that varies based on the advice being implemented,” Smith says. But an affiliated organization, such as a parent company, can.
“The interesting thing they built into these regs, which is very different from what had been said previously by the DOL, is that fee-leveling does not have to be across the entire organization,” Bitman says. “Now, an affiliated organization can receive additional compensation based on the fiduciary adviser’s advice, so long as the fiduciary adviser is not receiving additional compensation.”
The DOL’s computer-modeling regulations are less of a game-changer, Bitman says, in that, unlike the SunAmerica ruling, they do not cover discretionary investment advice. “But now you do not have to have an outside party running the computer model; it can be affiliated with the mutual fund complex,” he says. “Instead of having it done wholly outside, it can be developed internally, and have an outside entity certify that it works.” But the advice provider can go beyond the options offered under the computer model only if a participant asks for further guidance, he says.
The big question: Will the DOL’s final regulations bring new entrants to third-party investment advice? “The larger recordkeepers and larger mutual fund complexes would have more incentive to provide investment advice, because now they stand to make fees in connection with that advice,” Bitman says. “Previously, under Sun-America, it had to be an independent adviser.” But, he says, he has not seen them running to do so yet.
Asked if these new regulations might pose some threat to registered investment advisers (RIAs) who offer participant investment advice, Bitman is doubtful. “They are different avenues,” he says. “Many plan sponsors might like the idea of independent advice.”