Proposed change to ERISA expands fiduciary duty to include brokers who advise pension plans
The Labor Department on Thursday released a proposed rule that would rewrite the definition of a fiduciary under federal retirement law to include anyone who provides investment advice for a fee to a retirement plan or its participants. That includes broker-dealers.
The draft regulation is designed to amend a 1975 regulation that narrowed the term “investment advice” under the Employee Retirement Income Security Act of 1974.
Under the current rule, advisers must meet a five-part test to determine whether they are fiduciaries. That assessment includes determining whether advice is provided on a regular basis and whether it is the primary basis for a plan's investment decisions.
Both of those tests would be eliminated under the newly proposed regulation, making it easier for the agency to enforce fiduciary requirements.
“The [existing] rules have become a barrier to the department's ability to protect participants and beneficiaries,” said Assistant Labor Secretary Phyllis Borzi, who heads the Employee Benefits Security Administration.
In a blog statement that will be posted Friday, Ms. Borzi wrote that the five-step test “is increasingly difficult to administer in today's marketplace.” She cited complex new investment products and interwoven relationships among advisers, as well as a dramatic shift from defined-benefit to defined-contribution plans.
The new regulation would enable the agency to hold advisers accountable for conflicts of interest and “abuses … such as undisclosed fees,” Ms. Borzi wrote.
Due to be published in the Federal Register on Friday — and then open to a 90-day comment period — the proposal would classify as a fiduciary anyone who offers “advice, appraisals or fairness opinions concerning the value of securities or other property; recommendations as to the advisability of investing in, purchasing, holding or selling securities or other property; or advice or recommendations as to the management of securities or other property.”
The rule would also define as a fiduciary anyone defined as an adviser under the Investment Advisers Act of 1940. But it also reaches beyond that statute.
“If you hold yourself out as a fiduciary, you will be considered a fiduciary under this regulation,” Ms. Borzi said.
The regulation would not include target date funds nor would it define mutual fund advisers as fiduciaries. But it would include those who perform valuations of closely held employer securities in an employee stock ownership plans. It also would cover decisions regarding the hiring of investment managers.
Ms. Borzi said that the new rule would prevent advisers from skirting fiduciary responsibility when they provide advice only once, such as recommending an annuity carrier for assets when a plan is terminated. It also would stop advisers from claiming that they weren't the primary source of investment advice if a plan had hired a number of advisers.
The changes will make it easier for the agency to take advisers to court.
“Our ability to pursue litigation has been hampered by the five-point test,” said Timothy Hauser, associate solicitor at the Labor Department's Plan Benefits Security Division.
In its proposal, the department noted its concerns about adviser abuses related to guidance to participants who are leaving a plan.
“The department, therefore, is requesting comment on whether and to what extent the final regulation should define the provision of investment advice to encompass recommendations related to taking a plan distribution,” the regulation states.
Jessica Flores, managing partner of the Fiduciary Compliance Center, praised the rule for being “quite inclusive” and not providing exemptions for investment companies and their service arrangements.
“I'm actually pleasantly surprised as to the broad application of this new rule,” Ms. Flores wrote in an e-mail. “But I skeptically wonder how much of that broad application will stick.”
