|
|||||||||||||
|
NEW PENSION LAWS AFFECTING INVESTMENT ADVISERS August 21, 2006 Some less-publicized provisions of the recently passed Pension Protection Act of 2006 (“PPA”) will have significant effects on registered investment advisers who work with hedge funds or with pension plan clients. Limited Relief from ERISA Fiduciary Constraints The PPA contains these important changes for fund advisers or advisers to pension plans:
On the negative side, the $500,000 bonding requirement will be raised, effective January 1, 2007, for fiduciaries of plans that hold employer securities. New Competition from Investment Product Providers Key provisions in the PPA change the rules on who is permitted to offer investment advice on 401(k) and IRA plans. Most importantly, for the first time, the same companies that provide 401(k) investment products —such as mutual fund, brokerage and insurance companies—will be allowed to offer specific advice to plan participants on how to invest their accounts. Here are the details. In the past, federal conflict-of-interest laws prohibited firms from both managing investment plans and offering advice for fear that they would recommend their own high-fee funds to maximize their fee income, at the expense of the best interests of the plan participants. Financial institutions, however, have long lobbied Congress to be allowed to provide this type of investment advice, and their lobbying has borne fruit. The new rules let 401(k) providers give personalized investment advice to participants of employer-sponsored plans as long as the advice is based on a computer model that has been certified as bias-free by an independent third party. A different rule applies for IRA providers. They can offer specific investment advice to plan participants, but they are required to charge a flat rate fee for one year (with no computer model). During that time, Department of Labor and Treasury will study whether a computer model exists to tailor professional investment advice to an individual's own unique needs based on personal and subjective criteria about their financial and family circumstances. If they cannot certify that such a model exists, then the advisers will be allowed to provide advice free from the prohibited transaction exemption as long as they certify in writing that the company has adopted written policies and procedures which ensure that the investment advice provided is in the participant's best interest. The new law also puts in place fiduciary and disclosure safeguards thought to ensure that advice provided to employees is solely in their best interest. The new rules go into effect with respect to investment advice provided after December 31, 2006. We hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to call us.
|
|||||||||||||
