IMHO: Interests 'Bearing'

Last week the Labor Department issued a proposal that would, by its reckoning, provide the first update to the definition of an ERISA fiduciary since shortly after the birth of the federal regulation. 


The move was much-anticipated and, in the eyes of many, long overdue.  Clearly, the Labor Department wanted to narrow the exceptions to that definition (that were, somewhat ironically, put in place by the Labor Department of 1975) and, in the process, subject more advisers to ERISA’s fiduciary standards.    

At a high level, the Labor Department is seeking to restore the two-part test for fiduciary status found in ERISA, one that was expanded to be a five-part test in the 1975 regulations (see DoL Broadens Fiduciary Net).  The proposal seeks to set aside the additional conditions that the advice be rendered “on a regular basis,” that the advice would serve as a “primary basis” for investment decisions with respect to plan assets, that the recommendations are individualized for the plan, and that the advice be provided pursuant to a mutual understanding of the parties.  Instead, the new proposal would impose fiduciary status when a person renders investment advice with respect to any moneys or other property of a plan, or has any authority or responsibility to do so, and receives payment (direct or indirect) for that advice.    

The Impact 

That change is almost certainly going to drive some of those advisers (and their sponsoring organizations) away from these programs, though I am hard-pressed to mourn that loss (the proposal left intact the exemption for education, and if those lines are easily crossed, by now surely we all know where they are).  Those who remain may well charge more for their services in compensation for the extra exposure, certainly in the short run.  However, those who do so will be competing against organizations and advisers that made that commitment years ago and who appear to be competing quite successfully already.  Consequently, if the newly “converted” seek to profit by a rapid escalation of their fees, I suspect they won’t find that to be a successful strategy.   


Those responsible for closely held stock valuations are most likely to feel some pain in the short run.  After all, they have long enjoyed a special dispensation from fiduciary status   At this writing, I’m not altogether sure how one conducts a security valuation that is exclusively in the interests of the plan participants and beneficiaries—but I’m no more comfortable with the notion of a valuation that ignores the impact that those valuations could have on the exposure of the plan that takes on those assets based on that valuation. 


Distribution “Check?” 

One of the most interesting aspects of the proposal was the Labor Department’s expressed interest in reconsidering its position that a recommendation to a plan participant to take a permissible plan distribution would not constitute investment advice, even when combined with a recommendation as to how the distribution should be invested.  Said another way, the DoL is now willing to consider that such encouragement could constitute advice at a level sufficient to trigger ERISA fiduciary status.  In announcing its interest, the DoL noted that “[c]oncerns have been expressed that, as a result of this position, plan participants may not be adequately protected from advisers who provide distribution recommendations that subordinate participants’ interests to the advisers’ own interests.” In fact, there has already been litigation involving rollover advice—and there are any number of stories out there about advisers persuading participants to take advantage of early withdrawal provisions and pull their money out of the plan to put it in their hands.  Not that that couldn’t be advantageous for the participant—but shouldn’t the adviser encouraging them to pull money from ERISA’s environs be held to that same standard of care?  

Of course, at this point, the proposal is just that—though it will be interesting to see the comments that are made on this new definition over the next 90 days1.    

As for where this takes us, it has not always been clear that all plan sponsors fully appreciated the significance of working with advisers willing to put plan and participant interests ahead of their own.  But they should; and, IMHO, this proposal will improve the chances that they—and their participants—will benefit from that protection, whether they actively seek it or not. 



1Comments on the proposal can be submitted electronically by e-mail to (enter into subject line: Definition of Fiduciary Proposed Rule) or by using the Federal eRulemaking portal at