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DoL Gets Tough on Retirement-Plan Enforcement

New rules will soon be proposed to provide stronger protections against fiduciary negligence, and plan sponsors should aim to divert some obligations to plan providers.
Jeff Mamorsky, CFO.com | US
March 20, 2012

The Department of Labor's Employee Benefits Security Administration (EBSA) has significantly raised its enforcement efforts against plan advisers and sponsors. In 2011 the EBSA closed 3,472 civil cases that brought in nearly $1.39 billion. It also closed 302 criminal cases that resulted in 129 individuals being indicted, and 75 cases closed with guilty pleas and/or convictions. This year the DoL is increasing its enforcement personnel from 913 to 1,003.

Those numbers indicate that there is a lot of noncompliance with Employee Retirement Income Security Act fiduciaryduties. According to the DoL, that is because many advisers are surprisingly still unaware that the DoL has jurisdiction over them, and many plan sponsors are unaware of their responsibilities as ERISA fiduciaries.

The biggest area the EBSA is targeting is fiduciary negligence. The DoL, after withdrawing a proposed regulation to expand the definition of a fiduciary investment adviser, has announced it will repropose the regulation in May, and said it will have even stronger consumer protections. The proposal would replace an existing 37-year-old, five-part test included in 1975 DoL regulations that interpreted when offering advice resulted in fiduciary status.

Under those 1975 regulations, in order to be deemed a fiduciary as a result of providing investment advice, the adviser must:

In the preamble to the proposed regulations, the DoL emphasized that in the 37 years since the regulations were published, there has been significant change in retirement plans, including defined-contribution plans replacing defined-benefit plans as the predominant retirement-savings vehicle. The department also noted that in order to be deemed a fiduciary under the 1975 regulations, an adviser must meet all five of the criteria above, limiting the applicability of the original regulations.

The fiduciary definition the DoL proposed in October 2010 incorporated elements of the old test but expanded upon who may be considered a fiduciary. Under the new proposal, the types of activities related to providing advice that could result in fiduciary status include:

The EBSA recently launched an expanded "regulatory impact analysis" to assess the impact of the DoL's reproposed fiduciary rule. The DoL is conducting a more-robust economic analysis and requesting a significant amount of information from retirement-industry groups on client accounts, and trades within those accounts, during the past decade. The DoL is also requesting information about current and former ERISA plan account holders' economic attributes, financial literacy, length of time with their broker or adviser, and various other points of personal information about account holders and their broker or adviser. The DoL is using the data from these groups to determine the relationship between the quality of advice provided an individual investor, the specific fees being charged, and the performance of the account.


It is obvious from this increased regulatory and enforcement activity that the DoL is serious about fiduciary negligence, disclosure, and curbing conflicts of interest. It is also clear the department is aware of the view that individuals with conflicts who influence the decisions of plan participants and fiduciaries must themselves have fiduciary status. According to the DoL, the fiduciary regime governing such individuals cannot be based solely on vendor disclosure requirements, and a reproposed fiduciary definition is necessary to protect plan participants.

The reproposed fiduciary rule will primarily affect advisers and their fiduciary roles, not plan sponsors. However, plan sponsors should make sure that advisers have a strong documentable fiduciary process and make sure to include DoL-type protections in their service models. In effect, the astute employer plan sponsor should ask advisers what they can do to help the sponsor comply with the DoL rules and minimize the sponsor's liability to the DoL and plan participants.

Smart plan advisers should embrace fiduciary status, since plan sponsors need to rely on professional advisers who are legally accountable to plan participants. Plan sponsors need expert fiduciaries to clarify the confusion created by the regulatory onslaught of the DoL and IRS as well as the increasingly complex compensation arrangements of the retirement-services industry. Plan sponsors, members of the sponsor's board of directors, plan committee members, senior officers responsible for plan investment and administration, and other ERISA fiduciaries are required to fulfill their fiduciary duties with the knowledge and skill of a person "familiar with such matters" (see prudent person rule set forth in ERISA Section 404(a)(1)(B)). Accordingly, ERISA in effect requires the retention of experts to assist the plan sponsor in fulfilling its ERISA fiduciary duty.

As many plan sponsors are becoming aware of their responsibilities as ERISA fiduciaries, they are also becoming aware of their inability to understand and comply with DoL and IRS rules and regulations, and are searching for ways to "outsource" their fiduciary responsibility. They also realize that they are neither trained nor skilled to interpret vendor reports, monitor vendor services and fees, ask probing questions, and negotiate effectively on behalf of plan participants.

As a result, the issue of limiting or even eliminating ERISA fiduciary responsibility is on the short list of issues that employer plan sponsors, in particular their CFOs, should be currently addressing. Smart plan sponsors are retaining plan advisers who no longer fight fiduciary status but willingly embrace the acceptance of fiduciary responsibility under ERISA

Many plan sponsors are addressing this issue by retaining an ERISA expert as an independent or "managing fiduciary" as the designated named fiduciary for plan investments and administration. This eliminates all plan sponsor fiduciary liability except the duty to prudently select and monitor the performance of the managing fiduciary.

Jeff Mamorsky is co-chair of the global benefits practice at law firm Greenberg Traurig.




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