Hearing Debates Concerns with DOL's Fiduciary Proposal

By Stephen Miller, CEBS Jul 29, 2011

A July 26, 2011, hearing by the U.S. House Subcommittee on Health, Employment, Labor, and Pensions (HELP) examined the U.S. Department of Labor's (DOL) proposal to broaden the definition of a retirement plan fiduciary.


Under the Employee Retirement Income Security Act (ERISA), a person paid to provide investment advice with respect to assets of a private-sector employee benefit plan is a plan fiduciary who must act in the best interest of plan participants and beneficiaries or risk liability to lawsuits and government fines.

In 1975, the DOL issued a five-part regulatory test defining “investment advice.” Under the regulation, a person is a fiduciary under ERISA with respect to their advice if they make recommendations on investing in, purchasing or selling securities or other property, or give advice as to their value, on a regular basis, pursuant to a mutual understanding that the advice will serve as a primary basis for investment decisions and will be individualized to the needs of the plan. An investment advisor is not treated as a fiduciary unless each of the elements of this test is satisfied for each instance of advice.

On Oct. 22, 2010, the DOL published a proposed rule broadening the definition of fiduciary status to include those who provide services to retirement plan sponsors or participants that include appraisals or fairness opinions concerning the value of securities or other investment options; recommendations as to the advisability of investing in, purchasing, holding or selling securities or other investment options; and recommendations as to the management of securities or other investment options. (To learn more, see the SHRM Online articles "DOL Proposed Rule Broadens Definition of 'Fiduciaries' of Retirement Plans" and "Fiduciary Obligations: The Devil’s in the Details.")

Testimony: Pro and Con

Rep. Phil Roe, R-Tenn., the HELP subcommittee chairman, stated at the beginning of the hearing, "For more than 35 years, regulations surrounding fiduciary responsibility have provided certainty to employers and other retirement plan sponsors. ... However, the Labor Department has now decided to rewrite the rules of the road."

Roe continued, "While we support looking at ways to enhance this important definition, the current proposal is an ill-conceived expansion of the fiduciary standard. It will undermine efforts by employers and service providers to educate workers on the importance of responsible retirement planning. Regrettably, the proposal may deny investment opportunities and drive up costs for the individuals it is intended to protect."

But Assistant Secretary of Labor Phyllis Borzi, head of the DOL's Employee Benefits Security Administration (EBSA), countered, "The narrowness of the existing regulation opened the door to serious problems, and changes in the market since the regulation was issued in 1975 have allowed these problems to proliferate and intensify." She noted that "research has linked advisor conflicts with underperformance" and said that "EBSA’s own enforcement experience has demonstrated specific negative effects of conflicted investment advice."

Witnesses taking a critical view of the DOL proposal included Kenneth E. Bentsen, executive vice president for public policy at the Securities Industry and Financial Markets Association, a trade association. "The real question is the cost to plans and their participants and the impact on their retirement savings," he testified, adding that the DOL's cost analysis "leaves alarming gaps" in its estimation of the costs that the proposed rule would impose on plan sponsors and service providers, which would be passed on to plan participants and retirees.

The potential negative impact on financial institutions' willingness to provide investment education to plan participants was highlighted by Kent Mason, a partner in the law firm of Davis & Harman LLP. "There is great concern that the proposed regulation would sharply decrease the provision of investment education," he testified. "Since it can reasonably be expected that education about investment may be considered by the recipient in making investment decisions, providers of needed education will likely restrict the information that they provide due to the chance that they might become fiduciaries for providing what they consider to be educational materials."

Support of the proposal was given by Norman P. Stein, a professor at Drexel University's Earle Mack School of Law on behalf of the Pension Rights Center, an advocacy group representing employees and retirees. "If all investment advisors were fiduciaries, millions of Americans ... would receive a better quality of advice," he testified. "In our view, those who are unwilling to eschew serious conflicts have no business advising retirement plan participants."

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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