Although the regulations have been withdrawn, it's likely that the re-issued regulations will be substantially similar. As such, it's important to have a good understanding of the DOL's approach in order to be fully prepared when the new rules are in place.

Currently, an individual will only be considered a fiduciary investment advisor if he or she renders investment advice to a plan on a regular basis pursuant to an arrangement that such services will be the primary basis for investment decisions and such advice will be individualized to the plan. If any aspect of this rule is not satisfied, the investment advisor is not a fiduciary. 

The proposed regulations sought to replace this narrow rule with a significantly broader one, under which any person who has a particular relationship with a plan and who provides certain types of investment-related services to a plan or participants for a fee will be a fiduciary under ERISA. For purposes of the proposed regulations, a "fee" can be any compensation, direct or indirect, received from any source, including brokerage, mutual fund sales, and insurance commissions.

Under the proposed regulations, providing advice regarding the value, purchase, or management of any plan investment would have resulted in fiduciary status.  However, certain services would be excluded, including investment education, making investments (and information related to such investments) available to a plan through a platform of investments, and providing information regarding investment value for purposes of reporting and disclosure requirements.

An individual would have been considered a fiduciary investment advisor if he or she performed one of the covered services for a plan, a plan fiduciary, a participant, or beneficiary, and he or she:

1. represented that he or she was acting as a fiduciary; 2. was an ERISA fiduciary; 3. was a registered investment advisor; or 4. provided investment advice pursuant to an understanding that such advice may be considered in connection with making investment decisions under the plan and would be individualized to the needs of the plan, its fiduciaries, or its participants.

The proposed regulations also provided a "selling exception" under which an individual could avoid fiduciary status by disclosing that the advice was being provided by the advisor in a selling capacity, the advisor's interests were adverse to the interests of the plan, and the advice was not intended to be impartial. Although the existence of this exception as welcomed, the conditions were viewed by many as unrealistic. 

As you can see, these proposed regulations would have had a significant effect on the relationships between advisors and plans.  The elimination of the "regular basis" requirement, as well as the replacement of the "primary basis" rule with the concept that the advice "may be considered" in making investment decisions would have made many advisors fiduciaries, which likely would have had a chilling effect on the services made available to plans. 

Service providers and investment professionals who previously provided expanded information on a "one-off" basis, with the understanding that only regular advice would rise to the level of fiduciary investment advice, likely would have limited the information they provided in order to avoid fiduciary status.

Further, it is possible that, if such individuals became fiduciaries, their potential liability would have increased significantly.  Fiduciary status with regard to any aspect of a plan confers significant responsibilities, and it is possible that such individuals would have faced liability for events unrelated to their investment advice. For example, a fiduciary under ERISA has an affirmative obligation to address (and, if necessary, report) any breaches of fiduciary duty committed by other plan fiduciaries.  If a fiduciary fails to do so, he or she could be found liable as a co-fiduciary, even if such fiduciary took no part in the breach.

Finally, in the IRA market, the proposed rules would have made many IRA providers, as well as advisors to such IRAs, fiduciaries for providing the services they historically provided as non-fiduciaries.

Despite the potential liability, financial advisors may decide to take on these responsibilities for their clients (see my previous blog post for a discussion of this approach).  Another possibility is partnering with a third party that specializes in providing investment advisory services to retirement plans.  Many advisors are making ERISA Section 3(21) and/or 3(38) services available and a partnership of this nature may prove beneficial for service providers, advisors, and plan sponsors alike.