[13127]
February 5, 2001
TO: PENSION COMMITTEE No. 10-01
AD HOC COMMITTEE ON INVESTMENT ADVICE
RE: DOL ISSUES PROPOSED INDIVIDUAL EXEMPTIONS FOR TWO INVESTMENT
ADVISORY SERVICES
The Department of Labor has published two proposed individual exemptions
addressing the provision of investment advisory services with respect to retirement assets. The
first proposed exemption, requested by Keystone Brokerage, Inc., would provide retroactive
relief from the Code’s prohibited transaction restrictions for the provision of investment
advisory services to IRA owners, effective October 3, 1997 through June 30, 2000, the period
during which the advisory service was offered. The second exemption, requested by Ibbotson
Associates, Inc., would provide relief from the prohibited transaction restrictions of ERISA and
the Code for personalized asset allocation services provided to pension plan participants.
Comments on the Keystone exemption must be submitted by March 23, 2001; comments
on the Ibbotson exemption must be submitted by February 21, 2001.
Keystone Proposed Exemption
From October 3, 1997 to June 30, 2000, Keystone provided investment advisory services
to IRA owners with respect to mutual funds both affiliated and unaffiliated with Keystone.1
The proposed exemption would provide Keystone retroactive relief from the Code’s prohibited
transaction provisions for the provision of such services to IRA owners and the receipt of fees in
connection with the service. The proposed exemption states that Keystone and other parties to
the transactions requested the individual exemption in order to obtain retroactive relief for any
prohibited transactions that may have arisen during the operation of its investment advisory
program.2
1 The proposed exemption notes that Keystone discontinued the investment program effective June 30, 2000.
Currently, it is providing asset allocation services under a separate program which does not involve investment in
any affiliated funds or third-party funds from which it receives fees.
2 Specifically, Keystone notes that there is uncertainty regarding the availability of the “service provider” statutory
exemption in Code section 4975(d)(2) because the asset allocation recommendations made to IRA owners under the
investment advisory program may have caused such entities to be considered fiduciaries with respect to the IRAs.
2Under Keystone’s investment advisory program, known as the “KeyPremier Nautilus
Series Program” or “Nautilus Program,” IRA owners were provided with numerous disclosures
regarding the program3 and a questionnaire on the IRA owner’s investment objectives and risk
tolerance. Based on the responses to the questionnaire, Keystone determined which of the
available “asset allocation models” were the most appropriate for the IRA owner. Any
recommendations were implemented only at the express direction of the IRA owner. An IRA
account, however, could have been rebalanced on a quarterly basis in order to conform the
account to the chosen asset allocation model.
Keystone charged each participating IRA an annual “investment fee” based on a
percentage of assets in the IRA. This fee, however, was offset by: (1) all advisory fees,
including sub-advisory fees that were paid to third party sub-advisers, (2) all administrative
fees paid to BISYS, an unaffiliated service provider of the Keystone IRAs, (3) all administrative
fees paid to GGA, an affiliated investment adviser, and (4) all Rule 12b-1 fees paid to Keystone
and its affiliates by third party funds available under the program.4 Thus, the sum of the offset
and the “net investment fee” always equaled the “aggregate investment fee,” and the selection
of affiliated funds or third party funds was revenue neutral. Additionally, the total fees paid to
Keystone and its affiliates with respect to each investing IRA could not have constituted more
than reasonable compensation for services provided within the meaning of Code section
4975(d)(2).
Ibbotson Proposed Exemption
Under the proposed exemption, Ibbotson would deliver “asset allocation services” to
pension plan participants. Specifically, the advisory service would provide personalized
recommendations to plan participants regarding the allocation of their investments among the
options offered under their plan. Ibbotson would provide the service either directly to plan
participants through an agreement with a plan sponsor or with service providers sponsoring
the investment vehicles offered to participants.5
To participate in the program, an independent plan fiduciary must authorize in writing
the plan’s participation following the receipt of extensive disclosures, such as a written
disclosure describing the service and all fees and expenses associated with a service, a summary
3 The disclosures provided included: (1) a brochure describing the program, (2) an account agreement, (3) a
description of the available “asset allocation models,” (4) a reference guide/disclosure document outlining the
mechanics of the investment advisory program, the fees charged, and the procedures for establishing accounts and
making withdrawals and additions, (5) a statement regarding Keystone’s affiliation or non-affiliation with parties
who act as sponsors, distributors, administrators, investment advisers and sub-advisers, custodians and transfer
agents of the funds, and (6) copies of applicable fund prospectuses.
4 IRA accounts participating in the investment advisory program only invested in funds that did not charge a front or
back-end sales charge, or alternatively, such charges were waived.
5 “Service provider” would be defined as an entity that has been in the financial services business for at least three
years, without having been convicted of any felony offense, and also must be either (i) a bank, savings and loan
association, insurance company or registered investment adviser which meets the “qualified professional asset
manager” (QPAM) definition in PTE 84-14, and in addition, has total client assets under management and control in
an amount not less than $250 million, or (ii) a broker dealer registered under the Securities Exchange Act of 1934,
which has $1 million in shareholders’ or partners’ equity and total client assets under management and control in an
amount not less than $250 million.
3of annual plan activity and expense reports, and copies of the proposed and final exemptions.
Upon such authorization, Ibbotson would provide information to participants, including a
description of Ibbotson and its advisory service, an investment advisory service agreement
which would specify that the service would be provided by Ibbotson and not a plan service
provider, and a questionnaire designed to evaluate the participant’s personal financial situation.
Based on the questionnaire, the participant would receive recommendations on his or her
savings rate, retirement age, and the percentage of assets that the participant should allocate to
each investment option.6 Any recommendation, however, would be implemented only at the
direction of the participant.
Where Ibbotson contracts directly with a plan sponsor, the fees charged would be based
on a flat fee per participant, paid by the plan or the plan sponsor. Service providers would not
receive any portion of such fees or other consideration from Ibbotson. Where the advisory
service is offered to participants under an existing relationship between a plan sponsor and a
service provider, the fee for the service also must be flat, but may be paid by the service
provider, the plan or the participant. Additionally, a “technology licensing fee” would be
charged to the service provider, based on the number of participants in the service provider’s
recordkeeping system.
No plan service provider would be permitted to own any interest in Ibbotson, and
neither Ibbotson nor any affiliate would be allowed to own an interest in a plan service
provider. Furthermore, Ibbotson’s annual revenues derived from any one service provider may
not be more than 5 percent of Ibbotson’s annual revenues. In addition, neither the fees charged
nor the compensation received by Ibbotson may be affected by a participant’s investment
selection, and participation in the service may not cause the plan to pay any additional fees or
commissions with respect to the acquisition or disposition of investments offered under the
plan. Finally, the total fees paid to Ibbotson and a service provider by each participant utilizing
the advisory service may not exceed “reasonable compensation” within the meaning of ERISA
section 408(b)(2).
Thomas T. Kim
Assistant Counsel
Attachment
Attachment (in .pdf format)
6 The investment advice would be based on portfolios, with differing risk and return characteristics, using the plan’s
investment options. The investment options would be evaluated on a quarterly basis and the recommended asset
allocation would be updated once a year. Funds that do not meet certain performance criteria would be placed on a
“watch list”; Ibbotson may subsequently advise the plan sponsor that such funds be replaced. Additionally,
following the initial provision of advice, the program would inform participants of the need to review periodically
his or her situation, particularly where significant life events, such as the birth of a child, have occurred.