WASHINGTON BUREAU — Several top Democratic lawmakers are asking the U.S. Department of Labor to define the term "fiduciary" broadly in a proposed regulation that could affect parties that do business with retirement plans and plan participants.
The Democratic lawmakers say any limitations on fiduciary status should be narrowly tailored to address specific situations, and parties relying on the limitations should be required to fully disclose that information being provided is not fiduciary investment advice.
"Investment advice" should be construed broadly to include recommendations regarding plan distributions, the management of securities, investment manager selection, and asset allocation, the lawmakers say.
FIDUCIARY DEFINITION: THE EBSA VERSION
The Employee Benefits Security Administration (EBSA), an arm of the Labor Department, released the proposed investment advisor fiduciary rule in October.
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.
The EBSA rulemaking effort is separate from the U.S. Securities and Exchange Commission effort to decide whether securities brokers who provide personalized investment advice ought to meet the same kind of fiduciary standard that applies to investment advisors.
Today, to qualify as a retirement 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 on a regular basis, have some kind of agreement or arrangement with the plan or a plan fiduciary and provide individualized advice.
The proposed rule would expand the definition of plan "fiduciary" to include any person that provides investment advice to plans for a fee or other compensation.
Retirement services providers have welcomed EBSA efforts to update the fiduciary definition, but they have argued that the current version could cause some individuals or companies that do business with retirement plans to become fiduciaries by accident, without ever consciously agreeing to accept fiduciary responsibility or taking actions that are clearly associated with the concept of being a fiduciary.
THE LETTER
The group of Democratic lawmakers that signed the new comment letter includes Sen. Tom Harkin, D-Iowa, chairman of the Senate Health, Education, Labor and Pension Committee; Sen. Herb Kohl, D-Wisconsin, chairman of the Senate Special Committee on Aging; Rep. George Miller, D-Calif., the highest ranking Democratic member on the House Education and Work Force Committee; and Rep. Sander Levin, D-Mich., the highest ranking Democratic member on the House Ways and Means Committee.
One question concerns how often advisors must give a plan or participants advice before
they become fiduciaries.
The Democratic lawmakers say fiduciary status for advisors should not be conditioned on the advice being provided on a "regular basis" or serving as the "primary basis" for investment decisions.
Harkin added an accompanying letter in which he writes that, "Bad investment advice threatens the retirement security of all Americans."
"It is absolutely critical that retirement plan advisers be held to the highest standards under the law," Harkin says.
Investors rely on advisers to maximize the value of their investments, and "we see no reason that the advisers should not be held to the same standard as persons recommending the purchase or sale of a specific security," Harkin says. "We strongly encourage the [Labor] Department to include in the final rule a provision stating that recommendations regarding plan distributions constitute investment advice.
"In our judgment, distribution recommendations are inherently advice concerning plan investments because, when a participant takes a distribution, the participant generally liquidates a portion of his or her investments.
"Therefore, those providing advice with respect to plan distributions should be fiduciaries subject to ERISA's more rigorous protections."
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