A U.S. Department of Labor (DOL) proposed rule, published in the Federal Register on Oct. 22, 2010, updates and broadens the definition of "fiduciary" to include any person who provides investment advice to employee retirement plans and plan participants for a fee or other compensation.
The proposed rule would define these advisors as fiduciaries even if they do not provide advice on a “regular basis.” On adoption, the rule would affect plan sponsors, participants and beneficiaries of defined benefit and defined contribution retirement plans, as well as providers of investment and investment advice-related services to such plans and accounts, including consultants and brokers who offer investment advice.
The upshot: stricter regulations and expanded liability for consultants, advisors and brokers who offer investment-related advice to employers that provide 401(k) and other employee retirement plans.
According to the DOL, the proposed rule seeks to:
• Discourage harmful conflicts of interest by deterring service providers from engaging in self-dealing, acting imprudently and subordinating the plan’s interests.
• Enhance the DOL's ability to enforce and obtain redress from service providers who engage in abuses that currently exist in the market, such as undisclosed fees.
• Align the obligations of persons who provide appraisals to the plan with those of plan fiduciaries who rely on those appraisals.
• Designate as fiduciaries those investment advisors and consultants who represent themselves as such.
Fiduciaries and Nonfiduciaries
The DOL's proposed rule would amend a 1975 regulation that defines when a person providing investment advice becomes a fiduciary under the Employee Retirement Income Security Act (ERISA).
The ERISA fiduciary standard of care requires fiduciaries that provide advice, including investment recommendations, to ensure that the advice is in the client's best interest, above the advisor's own interest or his/her firm’s interest. Nonfiduciary advisors, such as brokers and other service providers, are often held to the suitability standard of care, which provides that they need only make recommendations that are “suitable” for a client based on the client's profile. In other words, if an essentially similar but lower cost investment were available, a nonfiduciary advisor need not recommend it (unless the price is so high it becomes unsuitable).
"The proposal will ensure that plans receive advice based on reliable information that protects the interests of plan participants and beneficiaries," said a statement released by Phyllis C. Borzi, assistant secretary of labor, who oversees the DOL's Employee Benefits Security Administration. "We believe that this proposal more closely reflects the statutory language of ERISA and the realities of the current investment marketplace, and therefore will ensure those who provide investment advice are held accountable as fiduciaries under the law."
The Independent Directors Council, which represents independent directors of mutual funds, testified before the House Financial Services Committee that it "supports the imposition of a fiduciary duty on broker-dealers who provide investment advice about securities, just as investment advisors are held to a fiduciary duty standard for the same conduct."
However, some securities brokers opposed this development. David A. Genelly, an attorney who advises brokers and financial advisors, wrote in a column published in Investment News: "A broker is a broker, and an advisor is an advisor. If brokers are now going to have the same fiduciary duties that advisors have, simply because they render some adjunct 'investment advice' when they make recommendations, there is no telling where the liability will stop."
Exceptions to Fiduciary Status
The proposed regulations do provide for certain actions that are not treated as rendering investment advice and would not result in fiduciary status. These include:
• Providing investment education information and materials.
• Marketing or making available a menu of investment alternatives that plan sponsors, participants or beneficiaries may choose from, and providing general financial information to assist in selecting and monitoring those investments, provided this is accompanied by a written disclosure that the party is not providing impartial investment advice.
Written comments on the proposed rule should be submitted to the DOL by Jan. 21, 2011, which is 90 days after the rule's publication. Comments may be submitted by e-mail to e-ORI@dol.gov (enter into subject line: Definition of Fiduciary Proposed Rule) or by using the Federal eRulemaking portal at www.regulations.gov.
Stephen Miller is an online editor/manager for SHRM.
DOL Releases Proposed Fiduciary Definition Regulations, JP Morgan, October 2010
Report Suggests Steps to Reduce Fiduciary Liability Lawsuits, SHRM Online Benefits Discipline, August 2010
Fiduciaries Can Avoid Becoming Defendants, SHRM Online Benefits Discipline, June 2010
Retirement Plan Sponsors Unclear on 'Fiduciary Responsibility,' SHRM Online Benefits Discipline, February 2010
SHRM Online Benefits Discipline
SHRM Online Retirement Plans Resource Page