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Proposed DOL regs expose more advisors to fiduciary liability

Language of rules amounts to better ammo for lawyers

Friday, October 22, 2010 – 6:17 AM by Elizabeth MacBride
Phyllis Borzi: If it gets rid of schlocky advice, that’s okay with me.

Elizabeth’s note: The Department of Labor has launched a multi-pronged effort to bring down the fees and costs in 401(k) plans. With this latest regulation, the DOL broadened the definition of fiduciary, which means that more people who are advising retirement plans, including IRAs, will be liable as fiduciaries.

The Department of Labor Thursday issued a proposed rule that broadens the ERISA definition of fiduciary to include advisors who are giving advice to a plan on a one-time basis; and advisors whose advice does not necessarily serve as a primary basis for plan investment decisions.

The regulation also says that people who call themselves fiduciaries will be held to ERISA’s fiduciary standard, even if they later try to claim a legal exemption. It follows last week’s ruling: Why the DOL’s massive new 401(k) disclosure requirements are a 'very, very big deal’

The broader definition will help the DOL successfully pursue more cases in which a fiduciary breach is alleged, said officials of the department in a conference call yesterday.

The proposed regulation will have a 90-day comment period, which ends Jan. 20th.

The DOL officials cited a couple of cases where the proposed rule would make life harder for advisors giving improper advice, including cases where a plan sponsor hires an advisor for one-time advice to wind down a plan, and cases where a plan sponsor hires more than one advisor. Under the current rule, each one of the multiple advisors would be exempt from being a fiduciary; under the updated rule, each one would be a fiduciary.

New business models.

Phil Chiricotti, president of the Center for Due Diligence, an information firm serving the retirement plans industry from Western Springs, Ill., said the new regulation could force advisors who are not already fiduciaries to change their business models.

He said the rule creates a new safe harbor, under which an advisor who does not wish to be a fiduciary can demonstrate that the the client knows they are operating as a purchaser or seller of securities and not undertaking to provide impartial investment advice.

“To avoid fiduciary status, (non-fiduciary advisors) would have to provide written disclaimers stating they are not providing impartial advice. If they fail to do so, they would be considered a fiduciary. As a result, any variable compensation would trigger non-exempt prohibited transactions under ERISA . Prohibited transactions have serious financial consequences and could bar an advisor from serving any retirement plan in the future, including their existing book of clients.”


The DOL said it is particularly soliciting comments on what the final regulation regarding rollovers should be. Currently, advice given on rollovers has not qualified as investment advice, the DOL said.

“The Department notes that it also has taken the position that, as a general matter, a recommendation to a plan participant to take an otherwise permissible plan distribution does not constitute investment advice within the meaning of the current regulation, even when that advice is combined with a recommendation as to how the distribution should be invested. Concerns 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. 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.”

Sean Cunniff, research director, brokerage and wealth management service of TowerGroup of Needham, Mass., said the rollover provision could cause a “firestorm.

Skeptical voice

Louis Harvey, president of Boston-based DALBAR, a research and auditing firm for the financial services industry, said he believed that although more advisors (the term in the context of retirement plans means anyone acting in that capacity to a retirement plan, whether they are RIAs or brokers) would be classed as fiduciaries, the expansion will affect a limited number of them.

He said the proposal lacked bite, and said that he had expected the DOL to change the definition of advice so that education was no longer excluded. Under that exclusion, he noted, many plan advisors escape fiduciary status by making their advice somewhat general and calling it “education.”

Schlocky advice

Phyllis Borzi, the Obama administration official who leads the Employee Benefits Security Administration, has been talking about broadening the standard for some time. But the exact timing of the new rule proposal may have been political. On Sept. 30th, the Office of the Inspector General released an audit saying that the DOL needed to do more to protect plan participants, including by broadening the definition of fiduciary.

Indeed, the DOL officials who spoke on the conference call focused on their ability to bring and win cases.

In its rule proposal, the DOL acknowledged the effect of the regulation is unknown. The DOL said it doesn’t know whether providers cost of doing business will go up because of the increased liability of being an ERISA fiduciary; the DOL also said it’s not sure whether the market of companies providing advice will shrink.

“If it gets rid of schlocky advice, that’s OK with me,” Borzi said.

Here’s a link to the proposed regulation.

Rickard Jorgensen

Rickard Jorgensen

October 22, 2010 — 2:33 PM

Great article. Unfortunately, the link to the proposed regulation is broken.

Nevin Freeman

Nevin Freeman

October 22, 2010 — 4:05 PM

Hmm, you’re right. Looks like the PDF was taken down — a Google search reveals that many others who had linked to it now have broken links as well. If we can find it again we’ll put it back up.


Nevin Freeman

Nevin Freeman

October 22, 2010 — 4:16 PM

Okay, link has been changed to our own hosted version of the file. Thanks Rickard for pointing this out!


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