Michael Davis, Deputy Assistant Secretary at the DoL, today began by saying how the concept of fiduciary is the core component of the Employee Retirement Income Security Act (ERISA). ERISA was created to protect participants and their assets, he said, and the fiduciary serves as the umbrella for these protections. The original five-part test to determine if one is acting as a fiduciary (the advice is individualized, provided for a fee, provided on a regular basis, pursuant to a mutual understanding between the plan sponsor and adviser, and the advice will form the primary basis for the plan’s decision-making), is being overhauled, Davis said, to better protect plan sponsors—particularly sponsors of smaller plans.
Small-plan sponsors too often fall victim to an “asymmetrical” system, said Davis. They have so much on their plates and therefore rely heavily on the advice they are given regarding their retirement plan—they shouldn’t have to worry if the advice was given in good faith or not.
“The rule is meant to update 35-year-old provisions for current market conditions. DC plans didn’t exist. Products are more complex. Sponsors shouldn’t have to worry about the spirit in which advice was given,” said Davis.
The proposed changes to the five-part test will remove the requirements that the advice is given on a regular basis and that it will serve as the primary resource for decision-making in the plan. Davis noted that currently an adviser can claim to be a fiduciary, but if one of the five parts is missing, the adviser could back out of this obligation if things go wrong. For instance, if the advice was not given regularly, legally, the adviser does not qualify as a fiduciary, no matter what was said beforehand. And the plan sponsor, who thought they had a adviser who was a fiduciary, is left to fend for himself.
Davis said the DoL recognized that these proposed changes to the definition of fiduciary would bring about passionate responses, and it has. Because of this, the exemptions to the question of who is a fiduciary are critical to point out, he said. There will be the seller’s exemption – if someone is clearly selling a product, they will not be held to fiduciary liability. (Another panelist noted that plan sponsors should not be fearful of listening to or accepting a sales pitch—just because someone is not a fiduciary, doesn’t mean that what they are doing is illegal.)
Davis also addressed the pushback the DoL has received regarding the inclusion of individual retirement accounts in its proposal. He said there has been a lot of concern over the topic, but the DoL felt that addressing regulations surrounding IRAs was imperative.
“From 1998 to 2004, 80% of assets in IRAs were from DC plan rollovers. As Boomers are retiring, this is becoming front and center; it’s the biggest move of assets in the history of the country. We can’t have different sets of provisions on the two sides. In an IRA environment, you don’t have the mediator, the plan sponsor; the participant is alone, so we need these protections in place,” he said.
Lastly, Davis mentioned how some people have suggested that the DoL redo the proposal altogether. This is unlikely, he said, because the comments that were received regarding the proposal can all be addressed using the original proposal as a basis—the DoL believes starting the proposal anew is unnecessary.
The final rule is expected to come out by the end of the year, he said, adding that it is a significant undertaking and the DoL is committed to seeing it through to the end.