Whether a new fiduciary regulation is needed to provide clarity and protection to retirement plans and participants or would be an onerous, costly and unnecessary regime that will curtail advice and wreck financial markets is what Department of Labor policymakers now must decide.
The proposed DOL regulation would change the five-part test that determines who is considered a fiduciary, the first update to the rule in 35 years. Last week, nearly 200 organizations from across the defined benefit and defined contribution industries lined up to voice their praise or disdain for the proposal at a hearing held by the Employee Benefits Security Administration.
DOL spokeswoman Gloria Della said Labor Department policymakers will consider and deliberate on the comments, but no final date for determination has been set.
The DOL says the proposed regulation aims to protect participants from conflicts of interest and self-dealing. “In recent years, non-fiduciary service providers — such as consultants, appraisers and other advisers — have abused their relationship with plans by recommending investments in exchange for undisclosed kickbacks from investment providers, engaging in bid-rigging, misleading plan fiduciaries about the nature and risks associated with plans' investments, and by giving biased, incompetent and unreliable valuation opinions,” the DOL noted in its proposal to change the fiduciary standard.
The EBSA cited in the proposed regulation a May 2005 study by the SEC, which “found that 13 of 24 pension consultants examined or their affiliates had undisclosed conflicts of interest.”
The proposed regulation changes the definition of a fiduciary by, among other things, removing existing provisions from the five-part test requiring advice to be given on a “regular basis” and mandating that the advice must serve as the “primary basis” for investment decisions. Other provisions in the five-part test in determining fiduciary status that will remain are: providing advice or recommendations on the purchase, sale or value of securities and other property; having a mutual understanding with the plan or fiduciary that advice is being given; and requiring that the advice is individualized based on the particular needs of the plan.
The updated test would cast a wider net by assigning fiduciary status under ERISA to those who meet any part of the new test. The current definition requires interested parties to meet all five parts of the test before being declared a fiduciary.
The proposal also requires service providers marketing investment options to disclose in writing that they are not providing impartial investment advice in order to avoid fiduciary status.
Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, said in prepared testimony filed jointly with the Council of Independent 401(k) Recordkeepers and the National Association of Independent Retirement Plan Advisors that the regulation “would provide needed clarity in terms of whether plans are receiving ERISA-covered investment advice.” All three organizations are based in Arlington, Va.
Mr. Graff said in a telephone interview that plan officials often inaccurately believe they are getting ERISA advice on the investment options they provide. “If someone tells me these are the 20 options you should use, anyone would think that is advice, but under ERISA it's not advice,” he said.
Mr. Graff also said the regulation should not apply to individual retirement accounts because of “fundamental differences between IRAs and qualified retirement plans.”
“It's crucial that no guidance be given (on IRAs) without support of an active enforcement regime,” he said in written testimony. “If the department decides to extend these regulations to IRAs ... players in the retirement industry who are more formally regulated with extensive compliance departments will comply with the rules, and those less formally regulated who know there is no practical enforcement of the rules, will choose not to comply,” giving them a competitive advantage over firms that are in compliance.
Mr. Graff also said disclosures required for commission-based brokers/advisers in the proposal are overly broad and “unduly harsh” and that DOL should allow them to avoid fiduciary status by disclosing the amount of any commission received, that the advice may not be impartial if a commission is received and that brokers/advisers are not acting as a fiduciary.