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<nobr>Feb 3, 2011</nobr>

ERIC Urges DOL to Consider Unintended Consequences in Expanding Definition of "Fiduciary"

ERIC News Release
For Immediate Release: February 3, 2011

Washington, D.C. -- The ERISA Industry Committee (ERIC) on February 2 submitted comments to the Department of Labor (DOL) on proposed regulations to change the definition of "fiduciary," warning the agency that, before significantly broadening the scope of the definition, the Department should consider carefully the unintended consequences that can result from swinging the pendulum too far in the other direction.

The proposed regulations, which were published in the Federal Register on October 22, 2010, would modify and expand the circumstances under which a person or entity is considered a fiduciary by reason of giving investment advice to an employee benefit plan or a plan's participants.

ERIC supports clear guidelines to ensure that persons who provide investment advice to plan fiduciaries and/or participants and beneficiaries are subject to ERISA's fiduciary standards, but warns that the risk of liability might cause well-intentioned stakeholders to refrain from providing informal assistance to plan participants, beneficiaries, and others who are in need.

"ERIC understands the Department's concern that the existing definition of 'fiduciary' might be too narrow. However, ERIC is concerned that if the definition is broadened too much, the fear of fiduciary liability will chill well-intentioned stakeholders' willingness to help others," said ERIC President Mark Ugoretz.

ERIC also says that it is important to take into account the costs that service providers who are treated as fiduciaries are likely to pass through to plans, which might include, for example, new insurance costs and a fee premium for being exposed to new legal risks.

The letter recommends, among other things, that the final regulations should include a safe harbor for advisers whose principal responsibilities do not include providing investment advice to ensure that well-intentioned stakeholders can offer informal assistance without the risk of fiduciary liability.

"In light of the consequences that can result from a misunderstanding or an inadvertent mistake, and the lack of a bright line between investment advice and investment education, ERIC respectfully requests a safe harbor to help stakeholders stay on the intended side of the line," Ugoretz says.

The letter further contends that a safe harbor would also improve the quality and consistency of advice, increase compliance, and protect the recipients of advice and other information.

ERIC also urges that the final regulation should clarify that the "for a fee" condition is not satisfied unless either (i) the adviser is engaged and paid to provide investment advice, or (ii) the adviser's compensation will be affected if the investment advice is followed. ERIC's letter provides examples addressing this situation, including that, if a financial planner's compensation is based on assets under management, or the adviser receives commissions from funds in which the advisee's account is invested, the "for a fee" condition is clearly satisfied. In contrast, however, if a call center employee receives a salary for answering questions about the plan, and investment advice is not in the employee's job description, the employee's salary should not be taken into account for purposes of determining whether investment advice is provided for a fee.

ERIC also argues that the mere fact that an individual is a fiduciary for one reason does not automatically make the individual a fiduciary for another reason. The proposed regulation provides that, if an individual is a fiduciary for a reason unrelated to providing investment advice (e.g., because the individual exercises discretionary authority or control with respect to management or administration of the plan), the individual will automatically be treated as a fiduciary with respect to investment advice.

The letter contends, however, that ERISA makes clear that a person is a fiduciary only "to the extent" that he renders investment advice for a fee. "Taking into account responsibilities unrelated to investment advice would be inconsistent with the well-settled principle that a fiduciary who wears two hats wears only one hat at a time," Ugoretz says.

Among ERIC's other recommendations are that:

  • Advice on whether to take a distribution should be treated like investment advice if (and only if) the advice is provided by an adviser who (a) is engaged before the distribution occurs for his or her investment or financial planning expertise, or (b) stands to gain from an investment decision related to the distribution.

  • With respect to any transaction, a person whose interests are adverse to the plan (or a participant or beneficiary) should not be treated as a fiduciary if he or she has taken reasonable steps to ensure that the recipient of the advice knows that the adviser is not undertaking to provide impartial investment advice.

  • Appraisals and fairness opinions should not be treated like investment advice unless (a) the appraisal or fairness opinion relates to a plan asset or property that will become a plan asset if it is purchased, and (b) there is a mutual understanding that the fairness opinion will be relied upon in a decision to buy or sell the property.

  • The final regulation should state expressly that it may not be taken into account with respect to advice provided before the effective date of the final regulation.

A link to ERIC's comments appears below.


For more information:
Ted Godbout
Director, Communications
The ERISA Industry Committee
1400 L Street, NW, Suite 350
Washington, DC 20005
Phone: (202) 789-1400
Fax: (202) 789-1120

The ERISA Industry Committee (ERIC) is a non-profit association committed to representing the advancement of the employee retirement, health, and compensation plans of America's largest employers. ERIC's members provide benchmark retirement, health care coverage, compensation, and other economic security benefits directly to tens of millions of active and retired workers and their families. ERIC has a strong interest in proposals affecting its members' ability to deliver those benefits, their cost and their effectiveness, as well as the role of those benefits in the American economy.

Text Files:

ERIC Comments on Proposal to Change Definition of Fiduciary

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