Recently the U.S. Department of Labor (“DOL”) issued proposed regulations which broaden the circumstances under which a person is considered to be a “fiduciary” by reason of giving investment advice to an employee benefit plan or a plan’s participants. In the proposed regulations preamble, the DOL acknowledges that the current regulations (issued in 1975) may inappropriately limit the types of investment-advice relationships that give rise to fiduciary duties on the part of the investment advisor.
Currently, the following five-part test determines whether a person is a fiduciary because they render investment advice:
i) the person renders advice as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing or selling securities or other property,
ii) on a regular basis,
iii) pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary, that
iv) the advice will serve as a primary basis for investment decision with respect to plan assets, and that
v) the advice will be individualized based on the particular needs of the plan.
The retirement plan community has changed significantly since 1975 from a predominance of defined benefit plans (in which the individual plan participant had no say in investment direction of plan assets) to defined contribution plans (in which the majority of participants direct investments in their individual accounts). Additionally, the types and complexity of investment products and services have increased. Therefore, the proposed regulations will add additional circumstances whereby providers of investment advice will be subject to ERISA’s fiduciary responsibility provisions.
The new test provides that a person who renders “investment advice” for a fee or other compensation, direct or indirect, within the meaning of ERISA, is an ERISA fiduciary if the person
i) provides advice or makes recommendations (including appraisals or fairness opinions concerning the value of securities or other property; on the advisability of investing in, purchasing, holding, or selling securities or other property; or on the management of securities or other property (e.g. voting proxies or the selection of persons to manage plan investments));
ii) directly or indirectly meets one of several conditions, generally relating to the degree of authority, control, responsibility or influence that is possessed by the person rendering the advice, and the reasonable expectations of the person receiving the advice; and
iii) receives a fee or other compensation, direct or indirect.
Notably, the proposed regulations no longer require that advice be rendered on a regular basis, nor do the parties have to have a mutual understanding that the advice will serve as a primary basis for plan investment decisions. The proposed regulations also make certain clarifications and provide specific exclusions.
- Representing or acknowledging that you are acting as a fiduciary within the meaning of ERISA is sufficient to result in fiduciary status (if a fee or other compensation is also provided).
- Advice to plan participants and beneficiaries is included, not only fiduciaries.
- Rendering advice for a fee includes any direct or indirect fees received by the advisor or an affiliate from any source, including brokerage, mutual fund or insurance sales commissions.
Any person who gives advice to employee benefit plans, participants, beneficiaries, or fiduciaries should carefully review the regulation and consult with counsel regarding the effect of the regulation.