On October 21, 2010, EBSA issued proposed regulations expanding the definition of fiduciary. Investment Advisors and service providers will have to examine the proposed rules to determine whether they fall under the broadened definition. The DOL is requesting comments by January 20, 2011. This ErisaALERT will provide a very brief overview of some of the major provisions of the proposed rules. You should talk to your service provider regarding the impact of the proposed rules on your arrangements.
Background
ERISA § 3(21)(A) provides the current definition of fiduciary is a person that with respect to a plan:
- Exercises any discretionary authority or control with respect to plan management or disposition of assets
- Renders investment advice for a fee or other compensation or has any authority or responsibility to do so or
- Has discretionary authority or responsibility in the administration of the plan.
DOL regulation §2510.3-21(c) provides a five part test (all of which must be satisfied) that defines the circumstances under which a person is deemed to render investment advice under ERISA:
- 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
- Renders such advice on a regular basis
- Renders such advice pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary, that
- The advice will serve as a primary basis for investment decisions with respect to plan assets, and that
- The advice will be individualized base on the particular needs of the plan.
What are some of the major differences?
The proposed rules would:
- Define certain advisers as fiduciaries even if they do not provide advice on a regular basis
- Eliminate the requirement that the parties have a mutual understanding that the advice will serve as a primary basis for plan investment decisions
- Include advisers who perform appraisals and fairness opinions concerning the value of securities or other property; such activities are currently excluded
- Provides exclusions if
- The recipient of the advice knows or should reasonably know under the circumstances, that the person is providing advice in its capacity as a purchaser or seller, whose interest is adverse to the interest of the plan as well as its participants or beneficiaries and that the person is not undertaking to provide impartial investment advice. To comply with this exclusion, the person seeking to avoid fiduciary status must demonstrate compliance with all the applicable requirements.
- Defined contribution service providers who “simply” make available a platform of services and investments from which the plan fiduciary chooses the investments with or without the assistance of the investment provider may avoid fiduciary status by disclosing in writing to the plan fiduciary that the defined contribution service provider is not undertaking to provide impartial investment advice.
Why is EBSA proposing the change?
The preamble to the regulations is worth a read especially if your service provider is likely to be included in the new proposed definition. Among the reasons provided are:
- The rules have not been changed since 1975 while the retirement plan community has changed dramatically shifting from defined benefit plan to defined contributions plans. The DOL regulations issued in 1975 narrow the definition as provided in ERISA making it time consuming for EBSA agents to substantiate fiduciary status.
- The types and complexities of investment practices lend themselves to conflict of interests that plan sponsors should understand. Changing the rules to add additional circumstances where investment advice providers are subject to ERISAs fiduciary standards would protect plan participants and beneficiaries.
- Amending the current regulation to define the circumstances under which a person is an ERISA fiduciary will discourage conflicts of interest, improve service value and enhance the government’s efforts to allocate its resources effectively
- The preamble mentioned a 2005 SEC study which revealed that ½ of pension consultants examined or their affiliates had undisclosed conflicts of interest. The study also revealed there were a number of relationships with broker-dealers that raised a number of concerns regarding potential harm to pension plans.
- The definition of fiduciary is very important to two national enforcement projects – the ESOP project and the Consultant/Adviser Project. One of the critical elements in these initiatives is determining if the service provider is a fiduciary which requires satisfying each part of the current 5 part test; this data gathering and investigative work utilizes a disproportionate time of the examiners time, time which is better spent on focusing on the misconduct at issue.
What it means to Plan Sponsors
Initially, service providers and investment providers will bear the brunt of dissecting the proposed regulations and determining whether their current plan contracts/arrangements would make them fiduciaries. The preamble indicates that the government expects that more service providers will be determined to be fiduciaries under the proposed rules. These service providers could experience higher costs of doing business which could result in higher fees as well as service providers leaving the market.
You may want to ask your providers if they have reviewed the regulations as it relates to your arrangement and whether they intend to submit comments on the proposed regulations; if yes, ask for a copy!
Note: all links are active as of the date of issuance of this ErisaALERT.
Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For more information on this ErisaALERT contact us by phone at 610-524-5351 and ask for Mary Andersen or 973-994-7539 and ask for Theresa Borzelli.
