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Proposed Expansion of the ERISA Fiduciary Definition

DOL Proposes to Expand Who Would Be Considered a Plan Fiduciary When Rendering Investment Advice

More of the individuals associated with 401(k) plan investment services would be considered fiduciaries, under an expansion of the ERISA fiduciary definition proposed by the Department of Labor. The proposal recognizes changes to the retirement plan landscape-in particular, the growth of defined contribution and 401(k) plans into the predominant form of retirement plan-along with the accompanying emergence of an industry that provides investment services to these plans, and their participants.

According to the DOL, "The proposal amends a 35-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 proposed rule takes account of significant changes in both the financial industry and the expectations of plan officials and participants who receive investment advice; it is designed to protect participants from 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."

Being amended are regulations issued in 1975 that created a five-part test for determining when the offering of investment advice gave rise to fiduciary status. This test had provided, that in order to be considered 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,
• On a regular basis,
• Pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary, that
• The advice will serve as a primary basis of investment decisions with respect to plan assets, and that
• The advice will be individualized based on the particular needs of the plan.

Under the DOL proposal, an individual would be considered a fiduciary under ERISA if any one of the following applies:

• The person represents or acknowledges to be acting as an ERISA fiduciary.
• The person is an investment advisor under Section 202(a)(11) of the Investment Advisors Act of 1940.
• The person provides advice, appraisals or fairness opinions concerning the value of securities or other property; recommendations as to the advisability of investing in, purchasing, holding or selling securities or other property; or advice or recommendations as to the management of securities or other property. DOL commentary on this particular provision indicates that it intends to establish fiduciary status for activities like the valuation of closely held employer securities in ESOP transactions or the valuation of real estate being considered for purchase by a plan.
• The person provides advice or makes recommendations pursuant to an agreement, arrangement or understanding, written or otherwise, that such advice may be considered in connection with making investment or management decisions with respect to plan assets, and will be individualized to the needs of the plan, a plan fiduciary, a participant or a beneficiary. While some of this proposed language remains similar to the old five-part test, there are notable differences-
         1. There is no requirement that the advice be provided on a regular basis.
         2. There is no requirement of a mutual understanding that the advice will serve as the primary basis for the investment decision.

The proposal specifies limitations and exceptions to the new fiduciary definition proposal. Notably, with respect to individual account plans, such as 401(k) plans, the proposal excludes providing investment education information and materials. Fiduciary status also would not be triggered by the marketing or making available of a fund platform or menu of investment alternatives along with general financial information to assist in selecting and monitoring those investments, so long as this is accompanied by a written disclosure that the person taking such actions is not intending to provide impartial investment advice.

These changes, if approved, will mean that more individuals-such as consultants and brokers who provide investment-related advice to plans and participants-may be considered plan fiduciaries, and thus be held to the highest standard, to ensure that the advice they provide is in the client's best interest, regardless of their own personal or professional interests.