DOL's Proposed Definition of 'Fiduciary' Draws Fire, Support

By Stephen Miller Feb 16, 2011

For updated information on this topic, please see the April 2015 SHRM Online article DOL Seeks Comments on Proposed Retirement Advice Rule.

The U.S. Department of Labor's (DOL) proposed rule to update and expand the definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA) to cover more broadly those who provide fee-based investment advice to retirement plan sponsors and participants has drawn support and opposition in comments submitted to the DOL.

The proposed rule, issued in October 2010, would amend a 1975 regulation regarding ERISA's definition of when a person providing investment advice becomes a fiduciary.

ERISA imposes a number of stringent duties on those who act as plan fiduciaries, including a duty of undivided loyalty, a duty to act for the exclusive purposes of providing plan benefits and defraying reasonable expenses of administering the plan, and a duty of care grounded in the "prudent man standard." Fiduciaries are personally liable for losses sustained by a plan that result from a violation of these duties.

The current regulation, which the DOL issued in 1975 shortly after ERISA was passed, creates a five-part test that must be satisfied in order for a provider of advice to be treated as a fiduciary. The advisor must (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 and do so (2) on a regular basis (3) pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary that (4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that (5) the advice will be individualized based on the particular needs of the plan.

Broader Liability

Among other changes, the DOL's proposed rule expands the definition of fiduciary to cover those who provide investment advice for a fee or other compensation, direct or indirect, to an employee benefit plan or to plan participants even if they do not provide advice on a regular basis, and regardless of whether the advice serves as the primary basis for investment decisions.

The proposal notes that the 1975 rule’s approach to fiduciary status "may inappropriately limit the DOL's ability to protect plans, participants and beneficiaries from conflicts of interest that may arise from today’s diverse and complex fee practices in the retirement plan services market."

Groups representing employers and financial advisors, who would bear additional legal liability under the proposed rule, expressed their strong opposition.

"We believe that the proposed regulations create too broad a definition of fiduciary, commented the American Benefits Council, a group representing employers. "We are very concerned that an overly broad definition would actually have a very adverse effect on retirement savings by raising costs, inhibiting investment education and guidance for plans and participants, and significantly shrinking the pool of service providers willing to provide such investment education and guidance," wrote Jan Jacobson, the group's senior counsel for retirement policy.

Concerns over raising costs and inhibiting
investment education.

She asked the DOL to ensure that the proposed regulations "be clarified so that in order to constitute fiduciary advice, recommendations must in all cases (1) be individualized to the needs of the plan, plan fiduciary, or participant or beneficiary, and (2) address the purchase, sale, or holding of specific securities, rather than market trends or asset allocations."

Similarly, "If the definition is broadened too much, the fear of fiduciary liability will chill well-intentioned stakeholders' willingness to help others," said a letter by ERISA Industry Committee (ERIC) President Mark Ugoretz. He urged the DOL to take into account the costs that service providers who are treated as fiduciaries are likely to pass through to plans, which might include new insurance costs and a fee premium for being exposed to new legal risks.

ERIC's letter recommends, among other things, that the final regulations include a safe harbor for advisors whose principal responsibilities do not include providing investment advice "to ensure that well-intentioned stakeholders can offer informal assistance without the risk of fiduciary liability."

Increased Participant Protection

Organizations that favor the proposal include the Pension Rights Center, a consumer advocacy group, and the National Employment Lawyers Association. In a joint letter to the DOL, they called the proposed redefinition of a fiduciary "much-needed and long-overdue.”

Countering criticism that proposal has received, the groups commented, "The new regulations recognize that investment advice is no less important merely because it is rendered on a one-time basis. ... Moreover, the regular basis requirement finds no support in the statute or the legislative history. Similarly, the requirement that advice be offered pursuant to an agreement or understanding that the advice will be a primary basis for making a decision is and always has been unsupported by [ERISA] and extremely difficult to prove."

The new regulations do not eliminate the requirement that advice be individualized, the groups stated. Rather, in their view, "The existing regulations provide that advice be individualized to the needs of the plan. The new regulations, in what we understand is clarification of the department’s existing interpretation, make clear that the advice may be individualized to the needs of the plan, plan fiduciary, plan participant, or beneficiary, i.e., to the needs of the recipient of the advice."

They added, "Many investment decisions are made by participants in 401(k) plans, and the advice given to them should not escape regulation because individual participants are uniquely vulnerable to self-interested investment pitches."

The DOL posted online all comments received on the proposal.

General Information or Investment Advice?

On March 1, 2011, the Employee Benefits Security Administration (EBSA) held a hearing on the DOL's proposed rule to expand the definition of a fiduciary to cover those who provide investment advice to retirement plan sponsors and participants. One key issue: at what point does general information becomes investment advice that qualifies a service provider as a fiduciary?

According to his written testimony, John Sweeney, executive vice-president of Fidelity Investments, offered insight into the range of approaches that his firm uses to provide general information to plan participants. He said the company hosted 20,000 live investor forums with more than 532,000 investors attending an event at either an investor center or workplace. It also provided targeted educational articles on a wide range of investor topics—and these have been read more than 4.5 million times. He noted that the company has seen a dramatic increase in the usage of guidance tools such as Portfolio Review and Retirement Income Planner, and that in 2010 Fidelity provided more than 1.4 million guidance interactions to customers and prospective customers free of charge.

“Any changes to the current ERISA definition of fiduciary investment advice should not threaten access to the guidance that all investors receive every day by placing a call, going on- line, attending an investor workshop or visiting a local branch office for one-on-one assistance,” Sweeney said. “Investors do not understand the underlying regulatory complexity that allows for the valuable services they receive.”

Financial Services Firms Brace for Change

U.S. financial services firms are preparing their brokers and service representatives for the U.S. Department of Labor's (DOL) anticipated expansion of the fiduciary standard, which will impact their ability to advise companies on fund selection for defined contribution retirement plans, reported Reuters.

Phyllis Borzi, assistant secretary for the DOL's Employee Benefits Security Administration (EBSA), announced on March 1, 2011, that EBSA plans to issue a final rule to expand the definition of fiduciary by year-end 2011.

The DOL's expanded definition of fiduciary is expected to limit brokers' ability to recommend their firms' proprietary investment products to employers, and to prohibit them from collecting commissions from product sponsors.

Brokers can continue working with plan clients as recordkeepers without accepting the fiduciary standard of care, but some plan sponsors might want to bring in third-party plan advisors to help them make fund selections. That, however, would add to their expenses, many contend.

Supporters of the expanded definition of fiduciary argue that financial service firm representatives and brokers can meet the broader standard by providing plan sponsors with a selection of best-in-class funds to choose from. However, if plan sponsors select funds that are not offered proprietarily by the financial firm acting as recordkeeper, that could lower the revenue earned by the financial firm and result in higher fees charged to plan sponsors.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related Article:

Retirement Plan Sponsors Unclear on 'Fiduciary Responsibility', SHRM Online Benefits Discipline, February 2010

Related Video--External:

Video: ASPPA on the Definition of Fiduciary

Quick Links:

Compensation & Benefits e-Newsletter:

To subscribe to SHRM's Compensation & Benefits e-newsletter, click below.

Sign Up Now


Job Finder

Find an HR Job Near You
Post a Job

HR Professional Development Education in a City Near You

SHRM Seminars are coming to cities across the US this fall.

Find a Seminar


Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 10,000 companies

Search & Connect