What plan sponsors need to know about DOL’s final QPAM changes 

May 10, 2024

The Department of Labor (DOL) has finalized amendments to a key ERISA prohibited transaction exemption widely used by asset managers for four decades. The exemption allows qualified professional asset managers (QPAMs) to engage in many routine transactions that ERISA would otherwise prohibit. While DOL expanded the circumstances that will make an asset manager ineligible to rely on the exemption, sponsors won’t need to take any immediate action in response to the changes. If a QPAM becomes ineligible to use the exemption in the future, it will need to notify the sponsor, who will have up to one year to assess and implement an appropriate course of action. DOL also confirmed that changes clarifying the scope of a QPAM’s authority over plan transactions won’t disrupt sponsors’ routine monitoring activities and establishment of investment guidelines. The changes take effect on June 17.

ERISA prohibits plan fiduciaries from engaging in transactions with a broad array of parties in interest — including employers, fiduciaries and service providers — unless a statutory or administrative exemption applies. In 1984, DOL granted a class exemption for QPAMs, allowing them to engage in a wide range of transactions for ERISA plans, subject to certain conditions. Other ERISA exemptions cover particular categories of transactions. However, the asset-management industry has come to rely heavily on the QPAM exemption because it provides a set of uniform conditions that streamline compliance for managing investment funds holding plan assets, including collective investment trusts (CITs) and separately managed accounts. (Mutual funds are statutorily exempt from ERISA’s plan asset rules.)

DOL believes the changes to the QPAM exemption are necessary to reflect the consolidation and increasingly global reach of the financial services industry over the past 40 years. These changes draw on DOL’s recent experience considering individual exemptions for QPAMs that became ineligible for the exemption due to criminal convictions.

While the final changes are more modest than those DOL proposed in 2022, they represent the most significant amendment to the QPAM exemption since its inception and include the following:

• Notice of ineligibility. A QPAM must notify its plan clients and DOL within 30 days of an event causing the QPAM to lose eligibility for the exemption.
• One-year transition period. The QPAM may continue using the exemption for up to one year after becoming ineligible, subject to additional conditions designed to protect its client plans.
• Foreign crimes are disqualifying. A conviction in a foreign jurisdiction for any crime that is “substantially equivalent” to a wide variety of disqualifying US crimes will cause a QPAM to lose eligibility for the exemption. However, convictions in countries designated as foreign adversaries are excluded to address commenters’ concerns that these countries may intentionally target U.S.-based asset managers.
• Other new ineligibility events. The amendment expands the disqualifying circumstances to encompass certain events occurring on or after June 17. These include entering into a domestic deferred or non-prosecution agreement for conduct that would have constituted a crime if prosecuted. Federal or state court findings that a QPAM has committed prohibited misconduct — such as engaging in a systematic pattern or practice of conduct that violates the conditions of the exemption or making materially misleading statements to federal or state regulators in connection with the exemption’s conditions — are also disqualifying. (A QPAM won’t become ineligible if it experienced one of these events before June 17.)
• Individual exemption process. Managers who apply for an individual exemption to continue relying on the QPAM exemption after the one-year transition period (or obtain supplemental relief) will have to provide additional information to DOL. The agency emphasizes that a QPAM should apply for an individual exemption as soon as an event causing ineligibility appears likely to occur.
• Scope of QPAM’s authority clarified. The amendment clarifies that the exemption is limited to investment decisions that are the QPAM’s sole responsibility. However, sponsors can provide investment guidelines and conduct routine monitoring without causing the QPAM to lose eligibility for the exemption.
• DOL notification and website posting. Asset managers relying on the exemption must notify DOL via email. DOL will post the list of registered QPAMs on a public website.
• Increased financial thresholds. Starting in 2025, asset managers must meet significantly higher monetary thresholds to qualify as QPAMs. DOL provided no relief for current QPAMs that can’t meet the higher thresholds, so some QPAMs may lose their ability to rely on the exemption next year.
• Recordkeeping requirements. QPAMs must maintain records showing compliance with the exemption for six years. These records generally must be available to DOL, IRS, other federal and state regulators, plan fiduciaries, employers, participants and beneficiaries.

The remainder of this article highlights aspects of the proposal of most interest to plan sponsors.

The exemption has long provided that if an asset manager — or one of its affiliates or controlling persons — is convicted of any of a number of criminal violations, the manager immediately loses its ability to rely on the QPAM exemption for a minimum of 10 years from the conviction date. To avoid undue disruptions to their client plans, QPAMs that have lost eligibility have typically sought a temporary one-year exemption from DOL. The amendment alleviates the need for a temporary exemption by incorporating a new automatic one-year transition period.

• New transactions allowed. During the transition period, the manager can continue relying on the exemption for new transactions, including actions necessary to renew continuing transactions — such as loans and leases — entered into before the QPAM became ineligible. This is a more workable solution for sponsors than DOL’s 2022 proposed one-year “wind-down” period, which wouldn’t have covered any new transactions (a restriction that might have caused plans to miss out on favorable investment opportunities or incur losses on securities the manager would otherwise sell).
• No new management relationships. The one-year transition period is only available to a QPAM’s preexisting client plans. While the manager could still enter into new client relationships with ERISA plans during the transition period, the manager couldn’t rely on the QPAM exemption for those plans.

To continue using the QPAM exemption beyond the one-year transition period, an ineligible manager would still need to seek an individual exemption from DOL. However, while DOL encourages ineligible QPAMs to apply for individual relief, the agency won’t guarantee granting such exemptions.

A QPAM must notify its client plans and DOL within 30 days of becoming ineligible. This notice must provide an objective description of the circumstances resulting in the QPAM’s ineligibility, with “sufficient detail to fully inform the client Plan’s fiduciary of the nature and severity of the conduct so that the fiduciary can satisfy its duties of prudence and loyalty” in considering whether to retain the manager in a non-QPAM capacity. The notice must also confirm that the manager agrees to the following conditions:

• No restrictions on termination or withdrawal. The QPAM won’t restrict a plan’s ability to terminate or withdraw from the arrangement.
• No excessive fees, penalties, or charges. If a plan withdraws or terminates its arrangement, the QPAM will charge only reasonable fees that have been disclosed in advance. Such fees would have to be designed to prevent “generally recognized abusive investment practices.” QPAMs that manage pooled investment funds — such as CITs — could also charge reasonable fees to ensure equitable treatment of all investors in the event of withdrawal, as long as the fees are applied consistently to all of the fund’s investors.
• Indemnification of plan losses. The QPAM will indemnify, hold harmless and restore actual losses to a plan for any damages due to the QPAM’s ineligibility. These damages would include losses and related costs for unwinding transactions with third parties and the plan transitioning to another asset manager, as well as costs associated with any exposure to prohibited transaction excise taxes under the Internal Revenue Code.
• Employment restrictions. The QPAM won’t employ or knowingly engage any individual who participated in the conduct giving rise to ineligibility. This restriction extends to individuals who knew about the conduct and either approved it or failed to take actions to address it.

DOL notes that these requirements are consistent with recent individual exemptions the agency has issued to ineligible QPAMs.

The final exemption omits a controversial provision in the proposal requiring that a QPAM’s written management agreement with client plans include certain required contractual terms to address future ineligibility. This provision would have applied to existing management relationships, with no transition period, meaning plan sponsors and QPAMs would have had only 60 days after publication of the final exemption to add those restrictions — a timeline many practitioners believed to be impracticable. Instead of requiring that management agreements be revised, the final rule incorporates those special terms into the conditions for the one-year transition period and notice of ineligibility that QPAMs must send to client plans.

DOL included language in the 2022 proposal “to make clear that a QPAM must not permit other parties in interest to make decisions regarding Plan investments under the QPAM’s control.” DOL said a QPAM must have and exercise discretion over these plan investment decisions and can’t simply be an independent approver of transactions proposed by a plan sponsor or other party in interest. Commenters raised a number of questions about the required scope of responsibility a manager needs to have over a transaction to qualify. In response, DOL discussed several clarifications in the explanatory preamble to the final amendment.

• Sponsor oversight and investment guidelines allowed. DOL confirmed that a sponsor’s routine oversight of managers — such as conducting meetings and inquiries necessary to satisfy the sponsor’s fiduciary monitoring obligations — wouldn’t interfere with the manager’s ability to use the QPAM exemption. Sponsors may also establish investment guidelines for QPAMs to follow and may coordinate an overall investment strategy among multiple QPAMs, but may not direct particular transactions. In the case of multiple QPAMs, each QPAM must retain sole authority for its own underlying investment transactions, and there can be no arrangement between the sponsor and QPAM to engage in specific transactions or benefit a particular person.
• Proxy voting by sponsors not covered. In response to comments, the preamble confirms that sponsors can’t rely on the QPAM exemption to vote proxies or exercise other shareholder rights on investments held under the QPAM’s authority. DOL views these as “subsidiary transactions” that aren’t — and were never intended to be — covered by the exemption unless performed under the QPAM’s sole authority. A sponsor’s direction for a manger to follow particular proxy voting guidelines presumably is allowed, but additional clarification would be helpful.
• Fund must be primarily for investment purposes. The final changes limit the exemption to investment funds established primarily for investment purposes. DOL clarified that this includes an investment fund that also makes benefit payments or engages in activities ancillary to investment purposes (e.g., paying plan expenses). A fund with no investment component — or only a minor investment component — wouldn’t be eligible for the exemption, even if the manager otherwise qualifies as a QPAM.

DOL encourages commenters to submit advisory opinion requests if additional clarification is needed on these or other issues relating to the scope of the QPAM’s authority.

Plan sponsors generally won’t have to take immediate action in response to the final QPAM amendment. However, if a sponsor receives a notice of ineligibility from a QPAM, the sponsor should consult with legal counsel as soon as possible to determine an appropriate course of action. While DOL doesn’t believe a sponsor must always replace an ineligible QPAM, the following factors may be relevant to a sponsor’s decision-making process:

• Whether the manager can use other prohibited transaction exemptions to manage the plan’s assets according to the investment guidelines or will need an individual exemption from DOL
• If the manger will need an individual exemption, whether the manager has already filed an application and the likelihood DOL will grant such an exemption before the transition period expires
• What fees and expenses the plan is likely to incur by terminating or withdrawing from the arrangement with the ineligible QPAM (i.e., reasonable fees the QPAM is allowed to charge)
• Whether the plan will incur costs that are covered by the manager’s indemnity obligation, and what records the sponsor should maintain to substantiate those costs (e.g., expenses for a replacement manger search)

DOL believes the one-year transition period provides adequate time for sponsors to consider whether to retain the ineligible QPAM or hire a different asset manager. However, because the QPAM has 30 days to furnish the notice of ineligibility, the sponsor may only have 11 months to evaluate. That timeframe may effectively be shorter for defined contribution plans, which generally must give participants 30- to 90-days’ advance notice of any change to a designated investment alternative.

• Amendment to prohibited transaction class exemption 84-14 (the QPAM exemption) (Federal Register, April 3, 2024)
• Fact sheet (DOL, April 2, 2024)
• Press release (DOL, April 2, 2024)

• DOL proposal may disrupt plan sponsors’ investment arrangements (Sept. 7, 2022)