PenChecks Blog

The Fiduciary Rule May Be Dead, But Fiduciary Responsibility Isn’t

It finally happened. The Fiduciary Rule officially died on June 21 when the Fifth Circuit Court of Appeals formally entered its order vacating the Rule. The Trump Department of Labor (DOL) declined to either file for a rehearing or request Supreme Court review.

The death of the Fiduciary Rule does not mean that plan sponsors and committee members cannot insist on getting nonconflicted fiduciary advice. It just makes their job harder.

It is worth the extra effort, because getting investment advice from an ERISA fiduciary makes a big difference. Non-fiduciary brokers and vendors are currently subject only to a requirement that they recommend “suitable” investments (which need not be the best-performing investments or those with the lowest fees), whereas ERISA fiduciaries must put the interest of the plan participants first and are personally liable for losses caused by their breach of fiduciary responsibility.

Will Other Laws Provide Protection?

Nothing is guaranteed.
On April 18, the SEC proposed its own “best interest” standard for brokers. This is not as stringent as the Fiduciary Rule, and it would apply only to “retail accounts”, which were not defined. While the SEC’s proposed best interest standard may apply to general advice to IRA holders and advice to individual plan participants about investments and rollovers, many practitioners do not think that advice to an investment committee or Company fiduciary making plan-wide decisions is advice to a “retail account”. And it is not clear that the SEC proposal will become law or whether it will be changed if it does.

Nevada, New York and Massachusetts have taken steps to provide greater fiduciary protections through law changes and enforcement. Other states may follow their lead. However, there are issues whether states are permitted to act in this area due to ERISA preemption, and the status of these laws and state enforcement is not clear.
Lawsuits challenging plan fees and investments will continue to be filed against plan fiduciaries. These suits often claim that vendors or brokers assumed fiduciary status when taking particular actions, and it is possible that decisions will expand the kinds of activities that make an adviser a fiduciary. However, to date, plaintiffs’ lawyers have not been very successful with these claims.

It is also possible that the DOL will issue a more limited Fiduciary Rule that expands responsibilities, but none of these actions can be counted on.

So where does that leave Company fiduciaries? They need to protect themselves by knowing the rules.

What Are They?

The regulations before the Fiduciary Rule, which date back to 1975, established a five-part test to determine whether investment advice for a fee was given in a fiduciary capacity. All five prongs of the test need to be satisfied, and many brokers and vendors structured their operations to avoid fiduciary status. Under the test, advice must be provided on a regular basis, so one-time advice by a person who isn’t already a fiduciary on issues such as rollovers is exempt. Advice must be provided with the understanding that it will be a primary basis for investment decisions and take into account the specific needs of the plan, so a plan with multiple advisers may not have any who function as fiduciaries. The DOL says that an indirect fee such as a commission paid by a third party is sufficient to trigger fiduciary status under the five-part test, which requires that the fiduciary receive compensation for the advice. However, at least one court has ruled that the adviser’s compensation must come from the plan.

The bottom line is that Company fiduciaries should take specific steps to make sure that they are getting advice from fiduciaries. These include:

  • Working only with advisers who will acknowledge their fiduciary status in writing and have many ERISA plan clients. Finding out if anyone’s status will change now that the Fiduciary Rule is no longer in effect.
  • Having a services agreement that clearly sets out the adviser’s ERISA responsibilities. These should include providing written reports that set forth the reasons for the adviser’s recommendations.
  • Doing a RFP, benchmark, or using other means to determine that your adviser’s fees are reasonable.
  • Getting a section 408b fee disclosure and Form ADV from advisers you hire.
  • Checking out the adviser’s references and whether the adviser has been involved in disciplinary action or lawsuits.
  • Reviewing the adviser’s performance on an annual basis and being prepared to replace an adviser who is not living up to the promises made at the time of hire.

Fortunately, there are many advisers who have been voluntarily accepting fiduciary responsibilities all along. In addition, more of those who assumed fiduciary status to comply with the Rule may decide to continue to act in that capacity rather than tell their customers they have scaled back their obligations. It won’t be hard to find advisers who will accept fiduciary responsibilities. However, it will be up to Company fiduciaries to take the steps listed above to protect themselves.

Carol I. Buckmann, JD is the co-founding partner of Cohen & Buckmann, P.C. (www.cohenbuckmann.com). She is one of the top-rated employee benefits and ERISA attorneys in the U.S., and deals with some of the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities and investment fund formation.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust, its subsidiaries or affiliates.

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