May 2011

On Oct. 21, 2010, the Department of Labor (DOL) issued a proposed regulation, which more broadly defines the circumstances under which a person is considered to be a fiduciary under ERISA by reason of providing investment advice to an employee benefit plan or the plan’s participants or beneficiaries.

Background

Section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (ERISA) provides, in part, that an individual is a fiduciary with respect to a plan if he or she renders investment advice with respect to plan assets for direct or indirect compensation or has the authority or responsibility to do so.

Prior DOL guidance established a 5-part test used to determine if a person was a fiduciary as a consequence of providing investment advice. Under this earlier guidance, a person who did not have discretionary authority or control with respect to the purchase or sale of securities or other plan property, would have been considered a fiduciary if:

1. The person rendered advice as to the value of securities or other property, or made recommendations as to the advisability of investing in, or purchasing or selling securities or other property
   1. On a regular basis
   2. Pursuant to a mutual agreement, arrangement or understanding with the plan or a plan fiduciary, and that
2. The advice was to serve as a primary basis for investment decisions with respect to plan assets
3. The advice was individualized based on the particular needs of the plan.

This prior guidance was provided in 1975 and has not been updated since. The DOL believes that significant changes to the financial and retirement plan marketplace since the rule was published have created the need to reexamine the types of advisory relationships that give rise to fiduciary status.

Proposed Rule Changes

1. Provides advice, or an appraisal or fairness opinion concerning the value of securities or other property, or
2. Makes recommendations as to the advisability of investing in, purchasing, holding or selling securities or other property, or
3. Provides advice or makes recommendations as to the management of securities or other property to a plan, a plan fiduciary or a plan participant or beneficiary, and the person is:
   1. Considered an ERISA fiduciary because of his or her discretion or authority under the plan, or
   2. Represents or acknowledges that he or she is an ERISA fiduciary, or
   3. Is an investment adviser under the Investment Advisers Act of 1940, or
   4. Is someone who provides advice or recommendations described in items 1-3 above, pursuant to an agreement or understanding that such advice may be considered in connection with making investment or management decisions with respect to plan assets and will be individualized to the needs of the plan, plan fiduciary or a participant or beneficiary.

The proposed rule eliminates the requirement that the advice be provided on a regular basis and that the advice will serve as a primary basis for investment decisions with respect to plan assets.

Exceptions 

Effective Date

At this time, the regulation is just a proposal. The DOL's 90 day period established for interested parties to provide comments has ended, as have an additional 15 days extended from the Employee Benefits Security Administration (EBSA) hearing in March. The transcript containing the most recent information on this proposal is posted on EBSA's webpage.

The final regulation will go into effect 180 days after the final regulation is published in the Federal Register.

Next Steps

We will keep you informed of any additional guidance that becomes available.