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Where Do you Go for Financial Advice?
May 2012
The effort by the U.S. Department of Labor (DOL) to restructure the definition of fiduciary investment advice has been one of the most significant regulatory initiatives affecting retirement plans in decades. As you may recall, the DOL initially proposed to amend the 35-year-old regulation in October 2010. That proposal would have considerably broadened the range of service providers who could be deemed fiduciaries subject to the Employee Retirement Income Security Act (ERISA). After significant pressure from Capitol Hill and the regulated community, the DOL publicly announced, on September 19, 2011, its intention to withdraw the proposal and issue a re-proposal. The DOL’s initial proposal was controversial for many reasons and received significant criticism from the defined contribution (DC) plan and individual retirement account (IRA) services industries. Notably, the proposed regulation would have eliminated requirements that fiduciary advice be provided to a plan or participant on a “regular basis” and with a “mutual understanding” that the advice would be the primary basis for plan investment decisions. The proposal also drastically limited the types of sales presentations investment professionals could provide to a plan or its participants without assuming ERISA “fiduciary” status. Because these professionals are understandably averse to assuming that liability, the drafted proposal may have inadvertently limited investor education efforts. The proposal also imposed fiduciary liability on those providing appraisal or valuation opinions with respect to securities or other property held by a plan. Most of these appraisers are unfamiliar with ERISA and ill-equipped to comply with the fiduciary duties the statute imposes. This extension of fiduciary liability seemed particularly inappropriate, because appraisers often have a limited (or nonexistent) ability even to identify the ERISA plans to which they would owe fiduciary duties.
The effort by the U.S. Department of Labor (DOL) to restructure the definition of fiduciary investment advice has been one of the most significant regulatory initiatives affecting retirement plans in decades. As you may recall, the DOL initially proposed to amend the 35-year-old regulation in October 2010. That proposal would have considerably broadened the range of service providers who could be deemed fiduciaries subject to the Employee Retirement Income Security Act (ERISA). After significant pressure from Capitol Hill and the regulated community, the DOL publicly announced, on September 19, 2011, its intention to withdraw the proposal and issue a re-proposal.
The DOL’s initial proposal was controversial for many reasons and received significant criticism from the defined contribution (DC) plan and individual retirement account (IRA) services industries. Notably, the proposed regulation would have eliminated requirements that fiduciary advice be provided to a plan or participant on a “regular basis” and with a “mutual understanding” that the advice would be the primary basis for plan investment decisions. The proposal also drastically limited the types of sales presentations investment professionals could provide to a plan or its participants without assuming ERISA “fiduciary” status. Because these professionals are understandably averse to assuming that liability, the drafted proposal may have inadvertently limited investor education efforts.
The proposal also imposed fiduciary liability on those providing appraisal or valuation opinions with respect to securities or other property held by a plan. Most of these appraisers are unfamiliar with ERISA and ill-equipped to comply with the fiduciary duties the statute imposes. This extension of fiduciary liability seemed particularly inappropriate, because appraisers often have a limited (or nonexistent) ability even to identify the ERISA plans to which they would owe fiduciary duties.