This is an extended version of the article that appeared in the June 2016 issue of Investment Advisor.
As a result of a new rule by the Employee Benefits Security Administration and the Department of Labor published on April 6, the definition of the term “fiduciary” will change on June 7. The rule impacts those who are fiduciaries to employee benefit plans under the Employee Retirement Income Security Act and retirement plans (including an individual retirement account) under the Internal Revenue Code. The fiduciary rule effectively treats all people who provide investment advice for compensation with respect to assets of a retirement plan or IRA as fiduciaries subject to ERISA’s various protections.
This should not be confused with an investment advisor’s fiduciary status under the Investment Advisers Act of 1940. Although the two have overlapping commonalities, ERISA contains certain transactions that are per se illegal, whereas most conflicts can be disclosed away under the Advisers Act.
Pursuant to the new rule, a person will be deemed to be rendering investment advice if that person directly or indirectly provides the following types of advice to a plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner for a fee or other compensation:
A recommendation to acquire, dispose of or exchange securities or other investment property
A recommendation as to how securities or other investment property should be invested after they are rolled over, transferred or distributed from the plan or IRA
A recommendation as to the management of securities or other investment property, including recommendations on investment policies or strategies; portfolio composition; selection of other advisors or managers; selection of investment account arrangements (e.g., brokerage or advisory); or recommendations with respect to rollovers, transfers or distributions
With respect to the investment advice described above, the recommendation is made either directly or indirectly (e.g., through or together with any affiliate) by a person who:
- Represents or acknowledges that he or she is acting as a fiduciary within the meaning of the Act or the IRC
Renders the advice pursuant to a written or verbal agreement that the advice is based on the particular investment needs of the advice recipient
Directs the advice to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA
ERISA requires plan fiduciaries to comply with certain fiduciary principles stemming from the law of trusts. These trust principles require that plan fiduciaries act in a prudent manner and with an undivided loyalty to the plans, participants and beneficiaries. In addition to these common law trust principles, fiduciaries must avoid engaging in “prohibited transactions.” Prohibited transactions are statutory prohibitions that fiduciaries cannot engage in without an applicable statutory or administrative exemption.
ERISA and the IRC generally prohibit fiduciaries from receiving payments from third parties and from recommending certain products that increase their own compensation in connection with investment advice rendered to participants and beneficiaries of an ERISA plan, IRA owners and those individuals who act as fiduciaries for an IRA or ERISA plans.