Featured Topics
Retirement Industry
Magazine Archive
Education/Advice
Where Do you Go for Financial Advice?
May 2006
Congress Set To Enact Major Changes While it is not at all surprising to see Congress expending an enormous effort in an attempt to fix the defined benefit plan system, it is surprising to see so many legislative changes under ERISA's fiduciary responsibility rule poised for enactment. While ultimate passage for some provisions is uncertain, it is surprising that so many of these fiduciary proposals have moved through Congress generally unscathed and almost unnoticed. The most controversial piece of the legislation is the amendment aimed at encouraging the provision of investment advice to participants. The House bill contains a prohibited transaction exemption that would allow an advisor to recommend investments—including proprietary mutual funds—that pay 12b-1 fees or other forms of compensation. The Senate bill does not provide exemptive relief; rather, it provides relief from ERISA's general fiduciary rules for a plan fiduciary's selection and monitoring of an independent investment advisor. The House bill also contains a number of revisions to DoL's current regulations that define the circumstances under which a private investment fund (such as a partnership) will be deemed to hold "plan assets" based on the investment of ERISA-covered plans. In particular, the amendment would increase the "significant participation" threshold from 25% to 50%. In addition, the definition of "benefit plan investor" would be narrowed to include only plans subject to ERISA or section 4975 of the Code. These amendments would benefit plan sponsors significantly by opening more private funds, and more highly sought-after money managers, to ERISA investors. However, there is no comparable provision in the Senate bill, so enactment is uncertain. Both the House and Senate bills contain significant new exemptions from ERISA's bonding requirements. The House bill would exempt brokers and dealers and certain of their affiliates from ERISA's bonding rules. The Senate bill would exempt only brokers and dealers from bonding, not their affiliates or investment advisors. top
Congress Set To Enact Major Changes
While it is not at all surprising to see Congress expending an enormous effort in an attempt to fix the defined benefit plan system, it is surprising to see so many legislative changes under ERISA's fiduciary responsibility rule poised for enactment. While ultimate passage for some provisions is uncertain, it is surprising that so many of these fiduciary proposals have moved through Congress generally unscathed and almost unnoticed.
The most controversial piece of the legislation is the amendment aimed at encouraging the provision of investment advice to participants. The House bill contains a prohibited transaction exemption that would allow an advisor to recommend investments—including proprietary mutual funds—that pay 12b-1 fees or other forms of compensation. The Senate bill does not provide exemptive relief; rather, it provides relief from ERISA's general fiduciary rules for a plan fiduciary's selection and monitoring of an independent investment advisor.
The House bill also contains a number of revisions to DoL's current regulations that define the circumstances under which a private investment fund (such as a partnership) will be deemed to hold "plan assets" based on the investment of ERISA-covered plans. In particular, the amendment would increase the "significant participation" threshold from 25% to 50%. In addition, the definition of "benefit plan investor" would be narrowed to include only plans subject to ERISA or section 4975 of the Code. These amendments would benefit plan sponsors significantly by opening more private funds, and more highly sought-after money managers, to ERISA investors. However, there is no comparable provision in the Senate bill, so enactment is uncertain.
Both the House and Senate bills contain significant new exemptions from ERISA's bonding requirements. The House bill would exempt brokers and dealers and certain of their affiliates from ERISA's bonding rules. The Senate bill would exempt only brokers and dealers from bonding, not their affiliates or investment advisors.
top