A fiduciary standard of care may end up applying to just about all financial professionals who are paid to offer investment advice to a benefit plan or to plan participants.
The Employee Benefits Security Administration (EBSA), an arm of the U.S. Labor Department, has put a broad new fiduciary standard provision in a draft regulation that is set to appear in the Federal Register Friday.
The proposed rule, 2010-26236; 29 CFR Part 2510, would amend a section of the Employee Retirement Income Security Act (ERISA) that defines when a person who provides investment advice becomes a fiduciary.
Today, to qualify as a plan fiduciary, a person must either have control or discretionary authority over plan investments, or the person must meet a 5-part test described in a 1975 regulation. The person must:
- Give advice about the value of or advisability of investing in securities or other property.
- Give the advice on a regular basis.
- Have some kind of agreement or arrangement with the plan or a plan fiduciary.
- Have an understanding that the advice will service as a primary basis for plan asset investment decisions.
- Provide advice individualized to suit, or appear to suit, the needs of a specific plan.
Under the current rules, “the [Labor] Department’s investigations of investment advisers must focus on establishing each of the elements of the 5-part test rather than on the precise misconduct at issue in particular cases,” EBSA officials say the preamble to the proposed regulations. “Even if an adviser advises a plan about its investments for a fee, the plan relied upon the advice based upon reasonable belief that it was impartial, and the advice was wholly abusive, the Department must still prove each of the test’s five elements in order to assert a fiduciary breach.”
The EBSA proposal would define certain advisors as fiduciaries even if they do not provide advice on a “regular basis.” The rule would affect sponsors, fiduciaries, participants, and beneficiaries of pension plans and individual retirement accounts.