In order to understand how the DOL’s proposed redefinition of the term “fiduciary” under ERISA will affect you as a plan sponsor, you must first understand the relationship you have with the current plan service providers.
Do any of your current plan service providers, such as your plan’s broker, registered investment advisor, or record keeper, provide fiduciary services to the plan? Are they a 3(21) co-fiduciary on the investment selection? Or are they a 3(38) fiduciary where they have taken on the role of choosing the investments for the plan?
The reason it is important to understand if your current providers are acting as a fiduciary, is due to the higher standard of care of prudence this causes them to be held to, along with the limiting of liability for the plan sponsor or their retirement plan committee.
If you find out that your current service providers are not fiduciaries, the question becomes, will the new proposed fiduciary rule cause them to now be a fiduciary?
To determine the potential fiduciary status of the current provider, it is important to understand the differences between the current rule and the proposed rule.
Currently, the DOL uses a five-part test to determine whether a plan advisor is providing “investment advice,” and therefore acting in a fiduciary capacity. For advice to be considered investment advice, an advisor must provide advice (1) as to the value of an investment or the wisdom of purchasing an investment, (2) on a regular basis, (3) pursuant to a mutual agreement between the advisor and advisee, (4) that is individualized, and (5) that serves as the primary basis for investment decisions. All five parts of this test must be met for advice to rise to the level of being fiduciary “investment advice.”
Under the proposed rule, the test would become a two-part test. An advisor would be deemed to be providing fiduciary “investment advice” by (1) providing investment or investment management appraisals, and (2) either (a) acknowledging their fiduciary status, or (b) acting pursuant to an agreement with the advisee that the advice is individualized and for consideration in making investment decisions. Notably, this removes the requirement that the advice be provided on a regular basis. For example, one time advice about whether to rollover an account would be considered fiduciary investment advice under the proposed rule.
This could have the effect of changing the status of many plan advisors who are currently non-fiduciaries to fiduciaries. This could be a positive for plan sponsors however. Why – because the advisor will be held to the higher fiduciary standard of having to make all decisions in plan participants’ best interests and they must be made in a prudent manner.
As a reminder, this is a proposed rule and there is still the possibility of the rule changing before it is final. That being said, as a plan sponsor, you should use this as a reminder to look at your current service agreements and arrangements. Double check to see who is serving in the fiduciary capacity for your plan, and whether they are providing services up to the high fiduciary standard.
To learn more about how this proposed DOL Fiduciary Rule change might affect you and ways you can mitigate your fiduciary risk, contact our ERISA Services Team
or call 800-234-9584
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.