Heads Up

Don’t know if you’ve been following the proposed DOL changes in the definition of “fiduciary” but you probably should. If you don’t advise clients on issues related to their pension plan investments why do you care? Because the new rule will also apply to IRAs. I’ve highlighted a few of the most significant issues.

Currently the agency goes by a five-part fiduciary test. According to the current rule, established in 1975, an advisor is not treated as a fiduciary unless, with respect to advice, he or she (1) makes recommendations on investing in, purchasing or selling securities or other property, or give advice as to their value (2) on a regular basis (3) pursuant to a mutual understanding that the advice (4) will serve as a primary basis for investment decisions, and (5) will be individualized to the particular needs of the plan.

The new proposed rule provides:

A person gives fiduciary investment advice if, for a direct or indirect fee, he or she –

Provides the requisite type of advice:

  • Appraisals or fairness opinions about the value of securities or other property;
  • Recommendations on investing in, purchasing, holding, or selling securities; or
  • Recommendations as to the management of securities or other property;

And meets one of the following conditions:

  • Represents to a plan, participant or beneficiary that the individual is acting as an ERISA fiduciary;
  • Is already an ERISA fiduciary to the plan by virtue of having any control over the management or disposition of plan assets, or by having discretionary authority over the administration of the plan;
  • Is an investment adviser under the Investment Advisers Act of 1940; or
  • Provides the advice pursuant to an agreement or understanding that the advice may be considered in connection with investment or management decisions with respect to plan assets and will be individualized to the needs of the plan.

Limitations recognizing that certain activities should not result in fiduciary status:

  • Persons who do not represent themselves to be ERISA fiduciaries, and who make it clear to the plan that they are acting for a purchaser/ seller on the opposite side of the transaction from the plan rather than providing impartial advice.
  • Employers who provide general financial/ investment information, such as recommendations on asset allocation to 401(k) participants under existing DOL guidance on investment education.
  • Persons who market investment option platforms to 401(k) plan fiduciaries on a non-individualized basis and disclose in writing that they are not providing impartial advice.
  • Appraisers who provide investment values to plans to use only for reporting their assets to the DOL and IRS.

Many financial services firms and organizations are actively working to have the rule proposed modified so, so far, the final result is still unknown. Stay tuned.

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