Risk & Compliance

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 obligatio...
Jeff MamorskyMarch 19, 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 fiduciary duties. 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:

  • 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.
  • Provide the advice on a regular basis.
  • Provide the advice pursuant to a mutual agreement, arrangement, or understanding with the plan or a plan fiduciary.
  • Make sure the advice will serve as a primary basis for investment decisions with respect to plan assets.
  • Make sure the advice will be individualized based on the particular needs of the plan.

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 adviser provides advice or makes recommendations pursuant to an agreement, arrangement, or understanding, written or otherwise, with the plan, a plan fiduciary, or a plan participant or beneficiary, where the advice may be considered in making investment or management decisions with respect to plan assets, and the advice will be individualized to the needs of the plan, a plan fiduciary, or a participant or beneficiary. While that language is similar to that of the old test, under the proposal the advice no longer needs to be offered on a regular basis; offering advice on a single occasion could result in fiduciary status. Also, the advice no longer needs to be offered as part of a mutual understanding that the advice will serve as the primary basis for investment decisions; the advice could be part of several factors the plan sponsor considers and still result in fiduciary status.
  • The adviser acknowledges fiduciary status for purposes of providing advice. This provision is significant because under the old test, a party could acknowledge fiduciary status and still fail to be held liable if the party did not meet all five parts of the old test.
  • The adviser acknowledges that it is an investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940.
  • The adviser provides advice, appraisals, or fairness opinions as to the value of investments; recommendations as to buying, selling, or holding assets; or recommendations as to the management of securities or other property. The DoL noted that part of the intent of this portion of the test is to establish fiduciary responsibility on parties that provide valuations of closely held employer securities and other hard-to-value plan assets.

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.