Fiduciary plan brings out fans, foes

Is a new fiduciary regulation needed to provide clarity and protection to retirement plans and participants, or would it be an onerous, costly and unnecessary regime that would curtail advice and wreck financial markets?

A proposed Labor Department regulation would change the five-part test that determines who is considered a fiduciary, the first update to the rule in 35 years. Recently, nearly 200 organizations from across the defined-benefit and defined-contribution industries lined up to voice their praise or disdain for the proposal at a hearing held by the Employee Benefits Security Administration.

Gloria Della, a spokeswoman for the Labor Department, said that its policymakers will consider and deliberate on the comments, but no final date for a decision has been set.

According to the Labor Department, the proposed regulation aims to protect participants from conflicts of interest and self-dealing. “In recent years, non-fiduciary service providers — such as consultants, appraisers and other advisers — have abused their relationship with plans by recommending investments in exchange for undisclosed kickbacks from investment providers, engaging in bid rigging, misleading plan fiduciaries about the nature and risks associated with plans’ investments, and by giving biased, incompetent and unreliable valuation opinions,” it said in its proposal to change the definition of “fiduciary.”

The EBSA cited a 2005 study by the Securities and Exchange Commission, which “found that 13 of 24 pension consultants examined or their affiliates had undisclosed conflicts of interest.”

The proposed regulation would change the definition by, among other things, removing existing provisions from the five-part test requiring advice to be given on a “regular basis” and mandating that the advice serve as the “primary basis” for investment decisions. Other provisions in the five-part test in determining fiduciary status that would remain are: providing advice or recommendations on the purchase, sale or value of securities and other property; having a mutual understanding with the plan or fiduciary that advice is being given; and requiring that the advice is individualized based on the particular needs of the plan.

The updated test would cast a wider net by assigning fiduciary status under the Employee Retirement Income Security Act of 1974 to those meeting any part of the new test. The current definition requires interested parties to meet all five parts of the test before being declared a fiduciary.

The proposal also would require service providers who market investment options to disclose in writing that they aren’t providing impartial investment advice in order to avoid fiduciary status.

The regulation “would provide needed clarity in terms of whether plans are receiving ERISA-covered investment advice,” Brian Graff, executive director and chief executive of the American Society of Pension Professionals & Actuaries, said in prepared testimony filed jointly with the Council of Independent 401(k) Recordkeepers and the National Association of Independent Retirement Plan Advisors.

Plan officials often think inaccurately that they are getting ERISA advice on the investment options they provide, Mr. Graff said.

“If someone tells me these are the 20 options you should use, anyone would think that is advice, but under ERISA, it’s not advice,” he said.

The regulation shouldn’t apply to individual retirement accounts because of “fundamental differences between IRAs and qualified retirement plans,” Mr. Graff said.

“It’s crucial that no guidance be given [on IRAs] without support of an active enforcement regime,” he said in written testimony. “If the department decides to extend these regulations to IRAs … players in the retirement industry who are more formally regulated with extensive compliance departments will comply with the rules, and those less formally regulated, who know there is no practical enforcement of the rules, will choose not to comply,” giving them a competitive advantage over firms that are in compliance.

Disclosures required for commission-based brokers and advisers in the proposal are overly broad and “unduly harsh” and the Labor Department should allow them to avoid fiduciary status by mandating that they disclose to plans the amount of any commission received, that the advice may not be impartial if a commission is received and that brokers and advisers aren’t acting as fiduciaries, Mr. Graff said.

MORE OPPOSITION

Other groups similarly argued against provisions of the proposal.

Paul Schott Stevens, president and chief executive of the Investment Company Institute, said that it is appropriate to update the regulation, noting that fiduciary status should apply to those giving advice even if it isn’t continuing. But other parts of the proposed regulation would trigger fiduciary status in unintended ways, he said.

Record keepers could be forced to be fiduciaries if they provide general assistance to plans. This could force plans to hire independent fiduciaries or forgo any assistance rather than obtaining input from record keepers, Mr. Stevens said.

The American Benefits Council argued that the proposal would hurt retirement plans and participants by increasing costs.

Kent Mason, a partner with the law firm Davis & Harmon who represented the council, testified that the proposal will have a “very adverse effect on retirement savings by raising costs and inhibiting investment education and guidance for plan participants.”

In a statement, he said: “We understand the desire of the department to update and improve the regulatory definition of fiduciary. However, we believe that the proposed regulation creates too broad a definition.”

The proposed regulation also could affect financial markets and the ability of DB plans to manage risk, according to one industry group.

Counterparties to swap transactions could become fiduciaries under the proposed regulation, forcing pension funds out of the swaps market, T. Timothy Ryan Jr., president and chief executive of the Securities Industry and Financial Markets Association, said in his testimony.

“For example, defined-benefit plans often use interest rate swaps to improve the match between assets and liabilities in order to reduce risk. Hedge funds execute strategies using swaps. The capital markets would be thrown into disarray for plans and plan asset vehicles, regardless of the intent of Congress and the government agencies responsible for regulation of financial markets.”

Timothy Inklebarger is a reporter at sister publication Pensions & Investments.