Retirement Plans

What’s a “Fiduciary”? Keep Fingers Crossed

Pressure from companies and finance firms will result in a new, business-friendly definition of the word as it pertains to retirement plans. At lea...
Jeff MamorskyOctober 18, 2011

A year ago, the Department of Labor proposed an update to Employee Retirement Income Security Act regulations that, since 1975, have defined an employee-benefit plan “fiduciary” as a person who provides “investment advice” to a plan or its participants. However, amid backlash from the financial and business communities, the DoL now says it will revise the proposed rules and reissue them in 2012.

Under the 36-year-old regulations, to offer “investment advice” an adviser must generally: (1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property, (2) on a regular basis, (3) pursuant to a mutual agreement, arrangement, or understanding with the plan (or a plan fiduciary). Also, (4) the advice must serve as a primary basis for investment decisions with respect to plan assets, and (5) the advice must be individualized based on the particular needs of the plan.

The DoL maintains that the five-part test has made enforcement difficult (i.e., investigators must prove all five elements to establish a fiduciary breach) and inappropriately limits the relationships that create fiduciary duties. The regulations proposed in 2010 would have considerably expanded the types of advice and circumstances that constituted a fiduciary relationship. Many more employers, as well as consultants, advisers, and appraisers, would have been branded as ERISA fiduciaries.

The DoL had claimed new rules were needed to reflect changes over the past 35 years in plan investment practices and in the relationships between plan advisers and their clients. The department cited fundamental shifts in retirement-plan design and the financial marketplace as the main drivers of the changes. Its October 2010 proposal labeled three types of advice regarding securities or other property that would necessarily label a person as a fiduciary: (1) valuation advice, appraisals, or fairness opinions; (2) recommendations to invest, buy, sell, or hold; and (3) management advice or recommendations.

To be a fiduciary, the person providing the advice would have had to satisfy one of four conditions. Either directly or indirectly (e.g., through an affiliate), the person must have (1) represented or acknowledged fiduciary status with respect to the advice, (2) been a fiduciary under either of the other parts of ERISA’s fiduciary definition, (3) been an “investment advisor” under the Investment Advisors Act of 1940, or (4) provided the advice under an agreement, arrangement, or understanding that individualized advice would be given and could be considered when making plan asset investment or management decisions. The proposed regulations eliminated the requirements that advice be given “on a regular basis” and serve as a primary basis for plan investment decisions.

Not only would many entities be cast as fiduciaries under ERISA, the entire financial industry would have been required to become intimately familiar with the DoL’s comprehensive rules, lest an unsuspecting adviser unwittingly become subject to the DoL’s wide net.

The uproar from the business community was quick in coming. After the proposed regulations’ release, the DoL received more than 260 written public comments, held two days of hearings, and conducted more than three dozen individual meetings with interested parties. Let’s hope the regulations now proposed to be issued next year will not affect businesses so negatively.

The forthcoming reproposal, consistent with President Obama’s January 2011 executive order on improving regulation and regulatory review, will provide an opportunity for additional input, review, and consideration. The DoL expects the revisions will elucidate that fiduciary advice is limited to individualized advice directed to specific parties, address the availability of exemptions for certain existing fee practices, and respond to concerns about the rules’ application to routine appraisals and arm’s-length commercial transactions (such as swap transactions).

However, the real impact will not be known until the reproposed rules are issued. Employers and advice-related service providers should stay tuned for the next chapter in the investment-advice saga.

Jeff Mamorsky is co-chair of the global benefits practice at law firm Greenberg Traurig. He extends his appreciation to his associate Ira Reifer in the preparation of this article.

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