The U.S. Department of Labor has released its long-awaited re-write of proposed changes to the rules determining who is a fiduciary under ERISA, and the different sides have rushed to respond by calling the proposal either a great step forward in consumer protection or likely to result in less or no advice to small plan fiduciaries and IRA owners.
While it is undeniable that the proposal would meaningfully expand the class of advisers who are fiduciaries, neither of these opposing responses is likely to be true. Does anyone really believe that advisers will give up such a lucrative market?
The devil is in the details, and objective observers should conclude that it is too early to tell exactly how this complicated proposal will affect the advice market. But it is, in fact, a proposal, not a final rule, and public comments may bring about some needed clarifications and changes. (A coalition has asked the DOL to extend the comment period to 120 days from the 75-day period in the proposal, but indications are that the DOL response will be negative.)
Here is my list of five steps the Department could take to improve the proposal:
Start by clarifying and narrowing the activities which result in fiduciary status. People should know when they assume personal liability. The elimination of the current requirements that investment advisers provide advice on a regular basis and that the advice must be individualized and given pursuant to an understanding that it will be a primary basis for plan decisions is a crucial step in extending broker and adviser accountability. However, the proposal’s definition also sweeps in recommendations that are “specifically directed” to a plan or IRA, even if not individualized, and it is not at all clear what that means. Can I become a fiduciary simply because I know that I am speaking with a plan or IRA owner? This vague basis for fiduciary status should be eliminated from the definition, and the inclusion of those who issue appraisals and fairness opinions should be reconsidered.
Provide a clear carve-out for the actuaries, lawyers and accountants who perform typical professional services in connection with investments. For example, benefits professionals are often asked by clients whether they are aware of good or bad experiences with particular managers or advisers or which managers or advisers their other clients might typically use. Under the proposed rule, however, recommending which managers or advisers to hire constitutes “investment advice”. The rule does not exempt them even though they are not paid any separate fee for such information, but are obviously being compensated generally for advising the client on other typical plan administrative or legal issues. It should be made clear that merely providing such information does not make you a fiduciary.
Provide a carve-out for sophisticated IRA investors similar to the carve-out for large plan investors with financial expertise. This could require a minimum IRA balance and some showing or self-certification of expertise. While it may be true that many IRA investors are not financially savvy, the former CFO of a business doesn’t need special protections.
Eliminate the “catch 22” for acknowledging fiduciary status. We should be encouraging acknowledgements of fiduciary status, but under the proposal, anyone who calls herself a fiduciary, regardless of the functions actually performed, seems to be a fiduciary for all purposes and prohibited from taking advantage of any of the carve-outs. Long-standing DOL authority holds that the same person may sometimes be acting in a fiduciary capacity and at other times may be a mere service provider. Where appropriate, carve-outs should be available to those who acknowledge fiduciary status.
Fix the “Best Interest” exemption. This exemption is needed if advisers to IRAs and to fiduciaries of small plans are to receive varying commissions and receive other traditional compensation in the “retail” market, but it should have clear and reasonable conditions. The proposal includes requirements that the adviser provide a warranty of: compliance with existing law and tell clients that they have a right to sue in class actions. This goes far beyond the DOL’s stated purpose in requiring advisers to put the client’s interest first. This would also be the first “principles based” exemption, and, if retained, the DOL needs to flesh out what the requirements, such as having policies in place to eliminate conflicts of interest, actually mean.
Of course, many other comments can and will be made, but these are a starting point.
We have long understood the need to update 1975 regulations to reflect the current market, and a re-write of those regulations is long overdue. But specialists everywhere are struggling to understand the details and how some of the complicated new rules are intended to work. We hope that the DOL will keep the important concepts and conditions in the proposal, but eliminate overbroad provisions and complexity that is extraneous to the proposal’s core purpose.