Recently, the DOL released its second attempt at redefining ERISA’s definition of “fiduciary” for the era of participant-directed retirement savings.
The new, proposed regulation is significantly different than ERISA’s existing definition, broadening both the group of individuals and firms considered fiduciaries, as well as expanding the retirement savings vehicles covered by the new fiduciary standards to include IRAs. Advisers, consultants and brokers are most significantly impacted by the proposed regulation as drafted, but plan sponsors can also expect changes: advisers and consultants previously not considered fiduciaries to date may now become fiduciaries, and employee investment education programs may need to be revised. The regulation is in proposed form right now and may change before the time it becomes final. This article introduces a few of the changes most applicable to plan sponsors.
Who Is a Fiduciary? The New Definition
The proposed regulation provides that a person is a fiduciary if he or she provides certain types of advice to a plan, plan fiduciary, plan participant, beneficiary or IRA owner in exchange for a fee or other compensation, and the person (or an affiliate) either acknowledges fiduciary status or provides the advice pursuant to an agreement, arrangement or understanding that the advice is individualized to or that such advice is specifically directed to the advice recipient for consideration in making investment or management decisions with respect to securities or other property of the plan or IRA.
The four types of advice covered by the proposed regulation are the following:
1. A recommendation as to the advisability of acquiring, holding, disposing or exchanging securities or other property, including recommendations to receive a distribution of benefits or rollover assets from a plan or IRA;
2. A recommendation as to the management of securities or other property, including recommendations as to the management of assets to be rolled over or distributed from a plan or IRA;
3. An appraisal, fairness opinion or similar statement concerning the value of securities or other property provided in connection with a specific transaction that involves the plan or IRA; and
4. A recommendation of a person who will also receive a fee or other compensation for providing the types of advice described in items 1 through 3.
Plan sponsors can expect that advisers and consultants they work with who have not been considered a fiduciary in the past may be a fiduciary under the proposed regulation. For example, this new definition provides that a person who advises a plan one time will be considered a fiduciary with respect to such advice. In the past, the advice needed to be provided on an ongoing basis in order to be considered fiduciary advice. The recommendation of another adviser is now considered fiduciary advice under the proposed regulation. As a result, consultants and advisers may be required to enter into new agreements, revise the manner in which their fees are paid, or provide rigorous disclosures to plan fiduciaries. Also, advice to plan participants regarding distributions or rollovers from a plan and advice to IRA owners are now considered fiduciary advice.