They've been at it for years. The Securities and Exchange Commission and the Department of Labor have been batting around a rule that, in one form or another, would raise investment-advice standards for brokers.

When something might actually happen is anyone's guess. Adoption had been expected this fall, though it now appears that next year could, in fact, be the year for a new fiduciary standard for advisors to retirement plans.

The stakes are high. Some industry groups have warned that the proposed revision to the 1974 Employee Retirement Income Security Act would effectively end the commission-based retirement advisory model, and that imposing a fiduciary responsibility would push many advisors and firms out of the retirement space, or out of business altogether.

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Until the regulators do whatever they're going to do, here are six things every employer should know about fiduciary liability at this moment:

1. Is a person who renders investment advice a fiduciary?

A person is considered a fiduciary with respect to an employee benefit plan to the extent that he "renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority to do so." Accordingly, the definition of fiduciary is a two-part test requiring both the provision of "investment advice" and the receipt of a "fee or other compensation" for such advice.

On Oct. 22, 2010, the DOL issued proposed regulations that will, if adopted in final format, dramatically change this two-part test by replacing it with rules that would subject more people to ERISA's fiduciary rules by providing that a person is a fiduciary under ERISA if that person provides, for a fee or other compensation, direct or indirect, to a plan, a plan fiduciary, plan participant, or beneficiary:

1. Advice, or an appraisal or fairness opinion about the value of securities or other property;

2. Recommendations as to the advisability of investing, buying, or selling securities or other property; or

3. Advice or recommendations as to the management of securities and other property.

And, such person also, either directly or indirectly (e.g., through, or together with, any affiliate):

1. Represents or acknowledges that it is acting as an ERISA fiduciary with respect to providing the above advice or recommendations;

2. Is a fiduciary with respect to the plan within the meaning of the ERISA Section 3(21)(a)(i) or (iii) basic definition of a fiduciary;

3. Is an investment adviser within the definition contained in the Investment Advisers Act of 1940; or

4. Provides advice or makes recommendations as described above pursuant to an agreement, arrangement, or understanding, written or otherwise, between such person and the plan, a plan fiduciary, or a plan participant or beneficiary that such advice may be considered in connection with making investment or management decisions with respect to plan assets, and will be individualized to the needs of the plan, a plan fiduciary, or a participant or beneficiary.

The DOL has announced that it will re-propose regulations on the definition of an ERISA fiduciary in the context of persons giving investment advice to an employee benefit plan or plan participants. The previously proposed regulations would have updated a 1975 regulation defining when a person providing investment advice becomes a fiduciary under ERISA, in order to adapt the rule to the current retirement marketplace. The proposal's goal is to ensure that potential conflicts of interest among advisers are not allowed to compromise the quality of investment advice that millions of American workers rely on, so they can retire with the dignity that they have worked hard to achieve. As of October 16, 2013, the DOL has yet to release the final rule.

It is important to note that the proposed regulation eliminates the requirement that the advice be rendered on a "regular basis" or as the "primary basis" elements of the current regulation while simultaneously expanding fiduciary status for the provision of advice or recommendations to participants and beneficiaries. This is quite an expansion of the circumstances under which a person may find herself a fiduciary. The DOL noted that its adoption of these proposed regulations "would protect beneficiaries of pension plans and individual retirement accounts by more broadly defining the circumstances under which a person is considered to be a 'fiduciary' by reason of giving investment advice to an employee benefit plan or a plan's Participants." In adopting the proposed regulations, the DOL provides that they are intended to take account of significant changes in the financial industry, to meet the expectations of plan officials and participants who receive investment advice, and to protect participants from conflicts of interest and self-dealing.

2. What about exceptions?

The proposed regulation does contain limits on this dramatic expansion of fiduciary status determination. Specifically, as it pertains to financial sales activities, a person will not be considered a fiduciary with respect to the provision of advice or recommendations if, with respect to a person other than one who acknowledges acting as a fiduciary with respect to providing investment advice or recommendations (e.g., investment manager), such person can demonstrate that the recipient of the advice knows or, under the circumstances, reasonably should know, that the person is providing the advice or making the recommendation in its capacity as a purchaser or seller of a security or other property, or as an agent of, or appraiser for, such a purchaser or seller, whose interests are adverse to the interests of the plan or its participants or beneficiaries, and that the person is not undertaking to provide impartial investment advice.3 These limitations also except from fiduciary status:

1. Anyone providing investment education pursuant to the provisions of Interpretive Bulletin 96-1;

2. The marketing or making available through a platform or similar mechanism, investment options a plan sponsor may select for plan participants only if the investment options are made available without regard to the individualized needs of the plan or its participants and the service provider makes a written disclosure to the plan that it is not providing impartial investment advice;

3. The provision of general financial information or data in connection with a plan fiduciary's selection and monitoring of investments only if the provider makes a written disclosure to the plan that it is not providing impartial investment advice; and

4. The provision of appraisals and valuations that do not include a report or statement that indicates that the value of the investment is being provided for purposes of compliance with the reporting and disclosure provisions of ERISA and the Internal Revenue Code, unless the appraisal or valuation covers an asset for which there is no generally recognized market, and serves as the basis on which a plan may make distributions to participants and beneficiaries.

Effective date

Comments are still being taken on this proposal thus no effective date has been implemented.

3. When will an employer be regulated as an investment adviser?

If an employer is "in the business of providing investment advice," it is subject to the registration requirements and regulation under the Investment Advisers Act of 1940 if it:

1. Holds itself out to the public as providing investment advice; or

2. Receives separate or additional compensation from employees or third parties that represents a clearly definable charge for providing investment advice.

If an employer is merely offering various investment options under a defined contribution plan, it will not be considered an investment adviser, unless it is otherwise in the business of providing investment advice.

If any money or other property of an employee benefit plan is invested in securities issued by an investment company registered under the Investment Company Act of 1940, the investment will not by itself cause the investment company or its investment adviser or principal underwriter to be deemed to be a fiduciary or party in interest, except to the extent that the adviser or underwriter acts in connection with an employee benefit plan covering employees of the investment company, of the investment adviser, or of the principal underwriter.

4. May a financial institution include the business of investment management of ERISA-covered plan assets under its control in the sales price of a fiduciary?

The Department of Labor has strongly cautioned financial firms not to use employee benefit plan assets in negotiating corporate sales. In PWBA News Release 97-82, the DOL stated that it is an abuse of fiduciary duty for a financial institution to hire investment managers and service providers for plans by including the business of managing plans under their control in the sales price of a subsidiary or division.

The news release quotes Assistant Secretary Alan D. Lebowitz as saying, "The department is concerned that other financial institutions may be using their plans to barter for higher purchase prices. There is no gray area under the law. Employers cannot promise prospective buyers that they will get plan business, especially if they stand to profit by reaping a higher price on the sale of an affiliate."

The DOL cautions that financial institutions that include in the sales price of a related subsidiary the business of managing plans under their control could be placing their interest ahead of the interests of the plans and participants in violation of ERISA Section 404(a)(1) and ERISA Section 406(b)(1).

5. What are "plan assets"?

ERISA defines plan assets in two contexts: plan investments and employee contributions.

Plan investments

When a plan invests in another entity, the plan assets generally include its own investments but do not, solely by reason of such investment, include any of the underlying assets of the entity. ERISA expressly provides that a plan's investment in the shares of a mutual fund does not by itself cause the fund or its investment adviser to be deemed a fiduciary. ERISA also provides that a plan's assets do not, solely by reason of such an investment, include any assets of the fund. The DOL has affirmed that the assets of "target date" and "lifecycle" mutual funds do not constitute plan assets of investing employee benefit plans, and the investment advisers to such mutual funds are not fiduciaries to investing plans merely because the funds invest in other, affiliated mutual funds. However, there is a "look-through" rule, which provides that in the case of a plan's investment in an equity interest of an entity that is neither a publicly offered security nor a security issued by an investment company registered under the Investment Company Act of 1940 (i.e., generally mutual funds), that plan's assets will include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established that:

 1.    The entity is an operating company; or

 2.    Equity participation in the entity by benefit plan investors is not significant.

If the look-through rule does apply, any person who exercises authority or control over the management and disposition of the underlying assets, or who provides investment advice with respect to such assets, is a fiduciary of the investing plan.

Generally, an investment by a plan in securities of a corporation or partnership will not, solely by reason of such investment, be considered an investment in the underlying assets of the corporation or partnership so as to make the assets of the entity "plan assets." Consequently, a subsequent transaction between the party in interest and the corporation or partnership generally would not constitute a prohibited transaction merely on account of such an investment.

Employee contributions

Under applicable regulations, plan assets include amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution to the plan as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets. However, in no case may such employee contributions be paid to the plan later than the 15th business day of the month following the month in which the contributions were withheld or received by the employer.

EBSA has amended the plan asset regulations to provide for a safe harbor under which participant contributions to a pension or welfare benefit plan with fewer than 100 participants at the beginning of the plan year will be treated as having been made to the plan in accordance with the general rule when contributions are deposited with the plan no later than: (1) the seventh business day following the day on which such amount is received by the employer; or (2) the seventh business day on which such amount would otherwise have been payable to the participant in cash. The Department of Labor has stated that in all other issues regarding plan assets, it will apply the rules of property rights for the determination of what constitutes plan assets. Plan assets will generally include any property, tangible or intangible, in which the plan holds a beneficial ownership interest. Beneficial ownership exists where:

1.    An employer has established a trust on behalf of the plan;

2.    The employer has set up a separate account with a bank or third party in the name of the plan; and

3.    The plan documents state that separately maintained funds belong to the plan.

 The DOL finalized the seven-business-day safe harbor for depositing participant contributions and loan repayments into small plans on Jan. 14, 2010. Under the final safe harbor, employers who sponsor plans with fewer than 100 participants are treated as having made a timely deposit under the plan asset rule if the contributions are deposited within seven business days after they (1) are received (if the contributions are paid to the employer), or (2) would have been paid in cash (if the contributions are withheld from wages). The safe harbor applies only to plans with fewer than 100 participants at the beginning of the plan year and became effective Jan. 14, 2010.

The final rule extends the general deposit timing rule and safe harbor to participant loan repayments. The final rule includes a new subsection affirming that the seven-business-day rule is merely a safe harbor and not the exclusive means for determining whether the general deposit timing rule has been met.

In Field Assistance Bulletin 2008-01 (Feb. 1, 2008), the DOL advises that the responsibility for collecting employer and employee contributions is a trustee responsibility. The FAB elaborates that a named or functional fiduciary that has the authority to appoint a plan's trustees must make certain that the proper party has been assigned the obligation of collecting plan contributions.

The FAB does provide two exceptions to the general holding of trustee responsibility: (1) where the plan expressly provides that the trustee will be a directed trustee with respect to contributions; and (2) where the authority to collect contributions is delegated to an investment manager.

In issuing the FAB, the DOL notes that it has encountered numerous trustee agreements with financial institutions relieving the institution serving as trustee of the responsibility to collect delinquent contributions without adequately assigning that duty to someone else. If no trustee or investment manager has the responsibility to make sure plan contributions are collected, the fiduciary with authority to hire trustees may be liable for plan losses based on to a failure to collect contributions due to the failure to properly assign the responsibility.

In late 2010, the DOL announced new civil and criminal enforcement actions to protect contributory retirement and health plan benefits (retirement and health plans for which employees have funds withheld from their paychecks to be deposited in their retirement plan's trust or to provide health benefits). In 2009, the DOL closed more than 1,000 401(k) plan investigations, with 910 of those closed involving corrected violations. The DOL described over 25 new civil actions filed in 2011 and 2012, to recover misused retirement and welfare plan contributions.

6. May an employer offer investment advice without incurring fiduciary liability?

Yes, within certain limitations. The Department of Labor has noted that with the growth of participant-directed individual account plans, more employees are directing the investment of their retirement plan assets and thereby assuming more responsibility for ensuring the adequacy of their retirement income. Simultaneously, the DOL has expressed increasing concern that many participants may not have sufficient understanding of investment principles and strategies to make their own informed investment decisions.

An Interpretive Bulletin provides final guidance on the provision of investment education for participants who are entitled to direct their own investments in an individual account plan. This guidance sets forth the views of the DOL regarding the circumstances under which the provision of investment-related information to participants will not constitute the "rendering of investment advice" under ERISA Section 3(21)(A)(ii).

The regulation establishes a series of graduated safe harbors for plan sponsors and service providers who provide participants and beneficiaries with the following specific categories of investment information and materials:

1. Investment education;

2. General financial and investment education;

3. Asset allocation models; and

4. Interactive investment materials.

NOTE: In late 2010, and again in 2011, the DOL released proposed regulations that have a significant impact on determining fiduciary status regarding advice and management decisions focusing on plan assets. You will find a detailed analysis of these proposed regulations and the impact they have on plan assets and individuals involved in the decisions and management of them in 2014 ERISA Facts, published by The National Underwriter Company. It is important to note that in these proposed regulations, the DOL reaffirms its position that the following information regarding investment education rendered pursuant to Interpretive Bulletin 96-1 remains intact and is, in no way, altered by the proposed regulations on fiduciary status in rendering investment advice.

The above article was drawn from the 2014 ERISA Facts, and originally published by The National Underwriter Company, a Summit Professional Networks business as well as a sister division of BenefitsPro.com. 

 

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