You Spin Me QPAM Baby QPAM: DOL’s Proposed QPAM Rule May Mean Changes to Collective Trust Agreements for Plan Sponsors
The DOL published on July 27, 2022 a proposed change to the QPAM Exemption (“Proposed QPAM Amendment”) that may require retirement plan sponsors to update their collective trust agreements in order to satisfy the new DOL requirements. Collective trusts have become an increasingly common way for qualified retirement plan committees/plan sponsors to achieve lower investment expenses for some of the investment options in their plans.
These collective trusts are managed by investment managers who often engage other financial institutions to execute trades involving the pension assets held by the collective trust. These trades involving retirement plan assets may at times be executed by a financial institution that is also providing services (such as recordkeeping services) to the same retirement plan. Absent an exemption, these sorts of related party transactions may violate the ERISA prohibited transaction rules.
Because collective trusts hold the assets of many ERISA retirement plans and an investment manager will not always know if a particular transaction would violate the ERISA prohibited transaction rules, investment managers have historically sought to satisfy a common prohibited transaction exemption referred to as the Qualified Professional Asset Manager (“QPAM”) Exemption.
If the Proposed QPAM Amendment goes into effect, investment managers relying on the QPAM Exemption:
- Will be required to satisfy a higher assets under management requirement in order to continue to qualify as a QPAM.
- Must begin to comply with new DOL reporting/recordkeeping requirements.
- Will be subject to new disqualification rules for misconduct.
- Must inform plan sponsors that the asset manager is solely responsible to ensure a particular transaction satisfies the QPAM exemption.
- Must update agreements with 401(k) plan sponsors to reflect the new requirements.
- Must indemnify plans for losses and costs incurred as a result of the asset manager losing the QPAM Exemption due to misconduct.
401(k) plan committees and plan sponsors should begin now to evaluate if any of the investment options in the plan are a collective trust or similar arrangement that relies on the QPAM Exemption to execute trades. If any 401(k) investment options may be impacted by the Proposed QPAM Amendment, plan committees and sponsors should begin discussions with the investment manager to confirm the manager is prepared to comply with these requirements.