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Redefining the Definition of Fiduciary

Earlier this month, 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.

Who Is Not a Fiduciary? The Carve-Outs

The DOL carved out seven types of advice that will not cause the person who provides such advice to be treated as a fiduciary. There are a total of seven carve-outs, as follows, each with its own rigorous conditions and requirements:

  1. The “Seller’s Carve-Out” covers recommendations to (a) plans with more than $100 million in assets and (b) certain plans with more than 100 participants in an arm’s-length transaction;
  2. Recommendations to enter into a swap or securities-based swap regulated under the Securities Exchange Act swap transactions;
  3. Employees of the plan sponsor who provide advice to the plan, so long as the employee does not receive additional compensation for providing the advice;
  4. Platform providers are not fiduciaries when they make available to a plan fiduciary a platform of investment alternatives to be selected for a participant-directed individual account plan;
  5. Selection and monitoring assistance by identifying investment alternatives that meet objective criteria specified by a plan fiduciary;
  6. Financial reports and valuations, including ESOP valuations and information required for reporting and disclosure requirements; and
  7. Investment or retirement education.

Seller’s Carve-Out

This carve-out provides that incidental advice provided in connection with an arm’s-length sale, purchase, loan or bilateral contract between an expert plan investor and an adviser is not investment advice covered under the proposed regulation. The DOL’s stated purpose for this carve-out is to avoid imposing ERISA fiduciary obligations on sales pitches that are part of an arm’s-length transaction where neither side assumes that the counterparty to the plan is acting as an impartial, trusted adviser. To qualify for the carve-out, the adviser must provide advice to an independent ERISA plan fiduciary with respect to an arm’s-length transaction between the plan and a counterparty or with respect to a proposal to enter into such a transaction. In addition, one of the following conditions must be met:

  1. The adviser obtains a representation from the plan fiduciary that the subject plan has 100 or more participants and that the plan fiduciary will not rely on the adviser to act in the best interest of the plan participants, to provide impartial investment advice, or to give advice in a fiduciary capacity; the adviser informs the plan fiduciary of his or her financial interest in the transaction; the adviser does not receive a fee or other compensation directly from the plan or plan fiduciary for any investment advice in connection with the transaction; and the adviser knows or reasonably believes the plan fiduciary has sufficient expertise to evaluate the transaction and determine if it is prudent and in the best interests of plan participants. (The adviser may rely on written representations from the plan or plan fiduciary for this purpose.)
  2. The adviser knows or reasonably believes that the subject plan has assets of at least $100 million. The adviser may rely on the information in the most recent Form 5500 for the plan for this purpose. There is no need to obtain written representations to satisfy the requirements for this alternative, but the adviser must inform the plan fiduciary that the adviser is not providing advice in a fiduciary capacity, and the adviser cannot collect a fee or other compensation from the plan or plan fiduciary for investment advice in connection with the transaction.

Investment Education Carve-Out

Generally, the DOL adopted the existing investment education safe harbor in DOL Interpretative Bulletin 96-1. However, there are significant changes that may require modifications to existing investment education programs. In particular, the proposed regulation precludes the identification of specific investment alternatives available under a plan in investment education materials. For example, an asset allocation model would not be considered education under the proposed regulations if it proposed a certain percentage of the participant’s assets be invested in large cap mutual funds and identified specific funds available under the plan’s investment lineup. The DOL believes that useful asset allocation education materials can be prepared and delivered to participants without identifying specific investment alternatives available under the plan. The DOL admits in the preamble to the proposed regulation that this provision marks a significant change from current investment education guidance, and the DOL has invited comments on whether the proposed change is appropriate. If the regulation is finalized in its proposed form, it can be expected that many participant investment education programs will need to be revamped to comply with the new requirements.


The proposed regulation is voluminous, and it includes not just the new definition and carve-outs but also amends existing prohibited transaction exemptions for advice fiduciaries and adds new prohibited transaction exemptions that will largely affect consultants and advisers providing advice covered by the regulations. In addition, the regulations include guidance regarding advice to IRA owners.

As mentioned at the outset, the regulations are currently in proposed form. The DOL has requested comments on various provisions of the proposal and will likely hold hearings as well. It is anticipated that the regulation will not be finalized and applicable for a significant amount of time, perhaps not until the beginning of 2017. It is also possible that the guidance in the proposed regulations will be changed before it is issued in final form. At this point in time, it is advisable for plan sponsors to be aware of the proposed changes and how they may affect agreements with existing and new consultants and advisers, as well current investment education programs. First Western Trust will keep you informed of changes to the proposal as they become available.