Plan sponsors who watched their retirement investments get buffeted by recent recessionary storms have had few ERISA remedies against broker dealers who led them to poor-performing funds.
The sole recourse under ERISA for plan members was to sue the plan sponsor who relied on the advice, rather than against the professional financial expert who gave it.
So, many ERISA retirement plan sponsors welcomed the Department of Labor (DOL’s) proposed redefinition of “fiduciary” to bring more financial advisers under the fiduciary umbrella — and ERISA liability.
More People Could Share the Blame
Under existing rules instituted in 1975, advice about investments is not considered to be ‘investment advice’ when: (1) the advice is only given once; or (2) if the adviser disavows that the advice would serve as a primary basis for the investment decision.
The DOL says a new definition is needed because of the shift from defined benefit retirement accounts to defined contribution accounts that require more maintenance in the face of market volatility.
DOL’s Oct. 22, 2010 rule would expand the cast of characters who can be held accountable/liable and who can be sued. Under ERISA’s definition, a “fiduciary” can be sued for not acting in the sole interest plans and plan beneficiaries.
The changes could be good for employers. Plan sponsors might be able to sleep easier at night if the threat of liability encourages brokers to: share more complete information about investment risks; not overvalue assets or allow too much to be charged for them; and pause before steering investors to funds and investments in which they have an ownership or compensation interest.
Since then the agency has been flooded with comments on the rule; from retirement and consumer advocates in support, and from the financial industry in opposition.
The debate took another turn last week when key Congressional members, such as House Education and Workforce Committee Chairman Phil Roe (R-Tenn.), disparaged the DOL’s proposed change.
“While we support looking at ways to enhance this important definition, the current proposal is an ill-conceived expansion of the fiduciary standard. … Regrettably, the proposal may deny investment opportunities and drive up costs for the individuals it is intended to protect,” Roe said. Here’s a transcript of the July 26 hearing.
Phyllis C. Borzi, Assistant Secretary of Labor of the Employee Benefits Security Administration (EBSA), has been an ardent supporter of the proposal. She highlighted key fiduciary regulation issues the DOL was examining, including how the proposed changes would affect:
- specific compensation arrangements;
- prohibited transactions;
- and the two primary exceptions to the fiduciary rule (investment education compared to investment advice; and the sellers’ exception).
See DOL’s website on the proposed update (including full text of the proposed new definition) .