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Industry Pans Accidental Fiduciary Status

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Financial services industry providers today asked the U.S. Department of Labor to treat them as retirement plan fiduciaries only if they agree in writing to be plan fiduciaries.

Provider representatives, consumer group representatives and others came together today for a U.S. Department of Labor hearing on efforts to update Employee Retirement Income Security Act (ERISA) retirement plan fiduciary rules.

The Employee Benefits Security Administration (EBSA), a Labor Department arm, has been working on updating the definitions of “fiduciary” and “investment advice.”

EBSA received 199 written comments on its work and 39 requests from individuals and groups that wanted to participate in the hearing.

Witnesses appeared on behalf of consumer groups such as AARP, Washington, and the Pension Rights Center, Washington; individual companies, such as Fidelity Investments, Boston, and Great-West Retirement Services, Greenwood Village, Colo.; and trade groups such as the American Council of Life Insurers, Washington, and the Insured Retirement Institute, Washington.


Plan fiduciaries have a legal obligation to put the interests of the plans and plan participants they serve ahead of their own.

Today, when regulators are deciding whether a service provider can be treated as an ERISA plan fiduciary, they first check to see whether a person has control or discretionary authority over plan investments.

If not, regulators apply a 5-part test first described in a regulation released in 1975, before 401(k) plans existed.

The service provider must give advice on a regular basis, have some kind of agreement or arrangement with the plan or a plan fiduciary, and provide individualized advice.

The draft rule released by EBSA rule would expand the definition of plan fiduciary to include any person that provides investment advice to plans for a fee or other compensation.

Norman Stein, a senior policy consultant at the Pension Rights Center, Washington, testified in favor of replacing the 5-part test with a broader definition.

ERISA itself defines “fiduciary” to include anyone who “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so,” Stein said, according to a written version of his testimony provided by the Pension Rights Center.

Regulators narrowed the definition improperly in the 1975 regulation, Stein said.

Since 1975, service providers have shifted from advising sophisticated defined benefit pension plan fiduciaries to advising 401(k) plan participants who, in many cases, have only rudimentary financial literacy, Stein said.

The importance of provider fiduciary status grew in 1993, when the U.S. Supreme Court ruled that an ERISA plan participant who loses money can sue only if a fiduciary’s breach of duty caused the plan a monetary loss, Stein said.

Stein said he believes that even non-individualized advice should be

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considered investment advice.

Otherwise, “this aspect of the regulation may provide perverse incentives to some providers of investment advice to avoid tailoring their advice to the particular needs of the individual,” Stein said.

Many financial services industry witnesses said they agree that there are problems with the current definition of “fiduciary,” and some criticized the 5-part test.

“When a broker [or] advisor is helping a small business owner set up a 401(k) plan and says to the owner, ‘These are the 20 investment options that you should offer in your plan,’ that owner naturally thinks he or she is getting advice,” said Brian Graff, executive director of the American Society of Pension Professionals & Actuaries, Arlington, Va, “In our members’ experience, these small business owners are surprised when they find out the ‘advice’ they have received for their ERISA-covered 401(k) plan is not actually ERISA-covered investment advice.”

The idea that an advisor has to provide advice regularly to be a fiduciary “is inconsistent with the reasonable expectations of plan fiduciaries and simply makes no sense,” Graff said.


Although financial services industry representatives at the hearing said they agree with EBSA officials on the need to update the definitions of “fiduciary” and “investment advice,” they said the definitions in the current draft regulation update are too vague.

EBSA may want to require any provider that provides certain types of services or has discretion over investments of plan assets to be a fiduciary, no matter what type of written agreements exist, said Larry Goldbrum, who appeared at the hearing on behalf of the SPARK Institute, Simsbury, Conn.

But Goldbrum – whose group represents large players in the retirement plan industry – said SPARK members would prefer to see those situations defined far more clearly.

In most cases, the main plan fiduciaries ought to be able work with service providers to determine, in writing, on whether the service providers will be plan fiduciaries, Goldbrum said.

Unless EBSA lets service providers define their roles in writing, “service providers will be at substantial risk of unintentionally and unwillingly becoming fiduciaries and engaging in prohibited transactions,” Goldbrum said.

In some cases, trial lawyers could retroactively arrange for providers that had no intention of assuming fiduciary responsibilities to be defined as plan fiduciaries, Goldbrum said.

“As a result, service providers will be forced to discontinue providing many services that plan sponsors and participants demand or to charge substantially higher fees in order to account for the higher risk and responsibility that comes with being a fiduciary,” Goldbrum said.


Some witnesses talked about the practical difficulties that could arise when retirement services providers try to implement the proposed fiduciary regulations.

Charles Nelson, who appeared for Great-West, said one problem with the proposed regulations is that EBSA failed to define key terms in the draft, such as fiduciary “management” advice.

Elsewhere, EBSA created a fiduciary definition exception for investment “platform” companies that simply give plan sponsors access to investment products, without providing individualized advice.

In real life, “a legitimate platform operator cannot provide its ordinary services without taking into account the individual and varying needs of its plan clients,” Nelson said.

When a plan is switching platforms, the platform provider may, for example, need to tell the sponsor which investment options available through the new platform are similar to the options available through the old platform, Goldbrum said.