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Pensions & Benefits Law A Discussion of Canadian and U.S./Cross-Border Pension & Benefit Legal Issues

Are You an ERISA Fiduciary? It May Become More Likely if You Give Investment Advice

Posted in U.S. Pensions & Benefits Law

The U.S. Department of Labor (DOL) has issued a proposed regulation intended to expand the class of advisers considered to be fiduciaries of plans subject to ERISA (which includes all 401(k) and other tax qualified plans) and IRAs. 

The consequence will be to impose an obligation to act in the interest of participants and potential personal liability on a larger class of advisers, and potentially to change the practices of some broker-dealers and consultants who currently take the position that they are not fiduciaries. Investment advice includes advice as to the value of securities or other property, or advice or recommendations as to the advisability of buying or selling securities or other property. However, current law imposes a number of additional conditions for fiduciary status.

What will change?

The current regulations provide that a person is not a fiduciary solely by reason of giving investment advice unless the advice is given for compensation on a regular basis, and there is an agreement or understanding that the advice will be individualized advice “based on the particular needs of the plan” and will be a primary basis for investment decisions. The DOL also previously determined that an appraiser of employer securities was not a fiduciary.

Under the DOL’s proposal:

More Activities Will Be Covered: Under the new rules, the type of advice potentially leading to fiduciary status would be expanded. Appraisers of plan assets, including real estate, and those who give fairness opinions, would be fiduciaries, as would advisers on proxy voting or other aspects of securities management and those who advise about the selection of investment options from available menus.

Fewer Conditions Will Apply: Any person who gives targeted investment advice (as redefined) to a plan, plan participants or beneficiaries, or to an IRA depositor will be a fiduciary if the advice is given for direct or indirect compensation, including compensation paid to an affiliate, and with the understanding that it will be considered in making investment or management decisions. This will bring in brokers and consultants who currently recommend securities or products from which they profit.

Some People Who Give Advice Will Always Be Fiduciaries, including registered advisers under the U.S. Advisers Act (probably including those registered under state law) and those who call themselves fiduciaries or are already fiduciaries of the Plan.

Fiduciary status is activity-based and generally cannot be disclaimed in contracts.

Who is not a Fiduciary?

  • Those who provide only investment education.
  • Those who sell a product without giving individualized advice or are counter-parties in transactions.
  • Anyone who makes recommendations about when to take distributions (though the DOL asks whether it should retain this exception.)
  • Anyone who provides only general information about available 401(k) plan investment options, such as mutual fund platforms, if a disclaimer is given in writing that the person is not undertaking to provide impartial investment advice.
  • Anyone valuing assets for reporting and disclosure purposes, unless there is no established market and the valuation is used to make distributions.

When Will the New Rules Apply?

The public, including the adviser and retirement communities, can file comments on the proposed changes through January 20, 2011. The new rules will be effective 180 days after the final rules are published in the federal register. Since the proposed regulations were announced with a great deal of fanfare, the final regulations can be expected to be issued on a relatively fast track.