Fiduciary Corner

DOL plugs a yawning gap in ERISA rules

Change would extend fiduciary standing to more of those providing retirement plan advice

Jun 26, 2011 @ 12:01 am

By Blaine F. Aikin

There is a gaping hole in ERISA regulations that allows many investment service providers to escape fiduciary accountability for the advice that they provide to retirement plan sponsors and participants.

The problem is that the Employee Retirement Income Security Act of 1974's definition of “fiduciary” is too narrow and nuanced. In particular, only advice that is both regular and serves as the primary source of decision making gives rise to fiduciary standing.

Last October, the Labor Department proposed changing the definition by dropping the “regular” and “primary” requirements so that even one-time or periodic advice that is considered part of the decision-making process by the recipients would make the provider a fiduciary. The change would have profound ramifications for those brokers and insurance agents offering advice under the lower suitability standard, simply because they could argue plausibly that it did not qualify as both regular and primary.

Under the revised definition, which the department intends to finalize by year-end, all personalized advice will be recognized for what it is: advice. Regardless of whether it is regular and central to decision making or merely occasional and influential, those who provide advice would be required to adhere to the fiduciary standard.

If the DOL proposal were adopted, many, but not all, brokers and insurance representatives serving the retirement market would become fiduciaries. The change would restore the originally intended distinction under the law between advisory versus traditional transactional services, and realign the services actually delivered to the proper regulatory standard.

A “seller's exemption” would provide that a purchaser or seller (e.g., a broker) wouldn't be a fiduciary so long as the client knew, or should have known, that the seller had conflicting interests and wasn't attempting to provide impartial advice. Exemptions also would be available for those providing investor education services or market investment platforms.

Nonetheless, hundreds of comments were submitted to the DOL opposing the proposal, mostly from financial services companies and their reps, who are able to provide advice without having to acknowledge it as such.


The arguments against the broader definition are familiar because they are offered by the same organizations and people that oppose extension of the fiduciary standard under the Dodd-Frank Act to everyone who provides advice to retail investors. Claims of increased cost and reduced product choice are the central themes of their complaints.

But these opponents duck the fundamental flaw in their argument.

Thousands of years of legal history demonstrate that society views advice as a fiduciary function that must be provided by professionals who can be held responsible for providing objective and competent guidance. The duties of loyalty and care are defining characteristics of professional advisers; they can't be negotiated away.

Even if one skips past the heart of the matter and debates instead the cost of the proposed change, extending the fiduciary standard is the right thing to do. There is scant evidence to suggest that adherence to the fiduciary standard leads to higher costs.


Meanwhile, the value of the standard in protecting the interests of investors and strengthening the reputation of the profession is obvious.

Furthermore, the reduced-choice argument is both off point and unfounded. There is little difference between the range of products and services available from financial advisers who adhere to a fiduciary standard and those available from nonfiduciary providers, especially in the retirement arena.

Moreover, the seller's exemption proposed by the DOL would exclude marketers of investment platforms from fiduciary status, leaving no unreasonable impediments to choice.

No one is suggesting that brokers and insurance agents are incapable of giving good, objective advice. The point is that those who provide advice must be more than generally ethical, knowledgeable and well-intentioned.

All advisers, as professionals, must also be truly accountable.

The DOL is taking a reasonable approach by proposing that all who provide advice be put on an equal footing, a plane that meets society's expectations for professionals and which most investors mistakenly believe are already required of all advisers.

Blaine F. Aikin is chief executive of Fiduciary360 LLC.


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