EBSA Proposes to Broaden Definition of "Fiduciary" under ERISA

The Department of Labor’s Employee Benefits Security Administration (EBSA) has issued a proposed rule that would change the definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA) to include a broader range of individuals who provide investment advice. According to a summary of the proposed rule published in the October 22, 2010 edition of the Federal Register, the proposed rule “amends a thirty-five year old rule that may inappropriately limit the types of investment advice relationships that give rise to fiduciary duties on the part of the investment advisor.” The rule is designed to limit conflicts of interest and self-dealing “by giving a broader and clearer understanding of when persons providing such advice are subject to ERISA’s fiduciary standards.” The definition change would impact sponsors, fiduciaries, participants, and beneficiaries of pension plans and individual retirement accounts, as well as providers of investment and investment advice related services to such plans and accounts.

Current law imposes a five-part test that must be satisfied in order for a person or an entity to be treated as a fiduciary by reason of rendering investment advice. Advice is considered “investment advice” if an adviser who does not have discretionary authority or control with respect to the purchase or sale of securities or other property for the plan:

  1. renders advice as to the value of securities or other property, or makes 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, 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.

The EBSA has stated that this definition is in need of an update in order to ensure that those providing investment advice to plan fiduciaries and/or plan participants and beneficiaries are subject to ERISA’s standards of fiduciary conduct. In essence, the proposed rule simplifies the above five-part test by providing that individuals are to be considered fiduciaries if they: (1) render investment advice described in the proposal to a plan, plan fiduciary, or plan participant or beneficiary for a fee or other compensation and (2) directly or indirectly represent or acknowledge that they are acting as a fiduciary within the meaning of ERISA with respect to the plan in rendering the advice. According to the EBSA, the proposal’s main changes include the following:

  • Considers appraisals and fairness opinions concerning the value of securities or other property as fiduciary investment advice;
  • Accords fiduciary status to those who render investment advice for a fee to a plan, its participants or beneficiaries and directly or indirectly represent or acknowledge that they are acting as a fiduciary within the meaning of ERISA in rendering the advice; and
  • Removes the requirements in the current regulation’s five-part test that investment advice must be provided on a regular basis based on the parties’ mutual understanding and that the advice will serve as a primary basis for plan investment decisions.

The EBSA acknowledges that plan service providers that fall within the proposed rule “might experience increased costs and liability exposure associated with ERISA fiduciary status. Consequently, EBSA acknowledges that these service providers might charge higher fees to plan clients, or limit or discontinue the availability of their services or products to ERISA plans.”

Comments on this proposal are due within 90 days of the proposed rule’s publication in the Federal Register. Among other things, the agency is seeking comment on whether and to what extent the final regulation should define the provision of investment advice to encompass recommendations related to taking a plan distribution; the accuracy of the agency’s estimate of the number of service providers that would be affected by this rule; and the accuracy of the EBSA’s cost estimate for service providers to comply with and implement this rule. Comments may be submitted electronically through the federal eRulemaking portal: www.regulations.gov; via email to: e-ORI@dol.gov (enter into subject line: Definition of Fiduciary Proposed Rule); or sent by mail or hand delivery to: Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: Definition of Fiduciary Proposed Rule, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
 

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.