After years of proposals, reproposals and court decisions invalidating them, the Department of Labor’s revised fiduciary rule has officially ceased to exist. The Trump Administration has indicated that it will not be issuing its own proposal. Where does that leave fiduciaries and those who would have become fiduciaries because they were deemed to be giving investment advice under the DOL rules? 1975 regulations will determine who becomes a fiduciary when giving investment advice.
Reviewing the 1975 Rule. The whole package of changes, including changes to commonly used class exemptions, are no longer in effect. An exception is Prohibited Transaction Exemption 2020-02, which has been used for advice regarding rollovers. This exemption was left in place without its Preamble and certain later amendments.
The end of efforts to rewrite the rules determining when investment advisers are fiduciaries also leaves in place the five part test set out in regulations issued under Section 3(21) of ERISA shortly after ERISA was enacted. In order to be a fiduciary as a result of giving investment advice, the following five criteria must all be satisfied:
1. Specific investment recommendations must be made.
2. The person making the recommendation must receive direct or indirect compensation.
3. The recommendations must be based on the specific needs of the plan.
4. The advice must be a primary basis for plan investment decisions.
5. The advice must be provided on a regular basis.
Rollover Advice. While an exemption might still be needed if a fiduciary gives rollover advice, a smaller group should need to rely on the exemption now. In particular, the Biden Administration position that anticipated advice given after an IRA rollover was made could be taken into account in determining whether rollover advice was given on a regular basis is no longer in effect. It is still possible to argue that one-time IRA rollover advice is not provided on a regular basis and is therefore not fiduciary investment advice..
Lack of consistency. Courts have sometimes issued puzzling or inconsistent decisions regarding the requirements of the five-part test and that can be expected to continue. For example, some courts have required that the advice be the primary basis rather than a primary basis for plan decisions, which can make a big difference if there are multiple sources of advice. As another example, in Tiblier v. Dlabal (743 F.3d 1004, 5th Cir. 2014), the court determined that compensation received by a broker for transacting a bond trade did not constitute compensation for purposes of the five-part test because the adviser shared the brokerage commission but did not receive any compensation from the plan. Plan sponsors will have to live with this uncertainty.
Functional fiduciaries. Nothing has altered the basic ERISA rule that you become a fiduciary based on what you do. If advisers are making investment recommendations under the five-part test, they cannot disclaim fiduciary status just by putting language to that effect in their contracts. Knowledge of fiduciary status isn’t required either. You can be a fiduciary even if you don’t know it.
Some service providers will still always be fiduciaries. It is important to note that fiduciary status also arises from having discretion in plan administration. These rules haven’t changed. While most recordkeeping agreements take the position that that the recordkeeper doesn’t exercise discretion when it follows employer-established policies, if the recordkeepers or an internal company employee exercises discretion in ruling on claims, appeals or QDRO qualification, those are still fiduciary activities.
Those who have discretion over plan investments such as investment managers or plan investment committees are also always fiduciaries because of their decision-making role..
Action steps for plan sponsors.. Despite the constant court challenges, there was also support for the DOL’s undertaking to replace the five-part test to reflect changing industry practices and inconsistent court decisions. It is interesting to speculate what might have happened if the Department of Labor’s updates to the investment advice regulations had been more focused and less sweeping. However, opportunities to change the standards determining when investment advice is fiduciary in nature have been exhausted for now.
Plan sponsor
fiduciaries need to live with this reality, but they can still protect themselves by insisting that investment recommendations be provided only by advisers who agree to follow ERISA’s fiduciary standards and will acknowledge ERISA fiduciary status in writing. Since fiduciaries can be personally liable for losses caused by their breach of fiduciary responsibilities, without this written acknowledgment there is an incentive to claim non-fiduciary status if an investment that was recommended goes south or the plan sponsor is sued by plaintiffs claiming an investment choice that was recommended was imprudent. However, fiduciary advisers will be co-fiduciaries with the plan sponsor committee or the individuals actually making the investment decisions. Plan sponsors looking for greater delegation of their fiduciary responsibility might also consider outsourcing investment responsibility to investment managers described in Section 3(38) of ERISA, outsourced chief investment officers (OCIOs) or through pooled plan providers (PEPs) run by professionals.