Proposal Would Dramatically Change the Definition of Fiduciary

white houseDue to the inadequacy of the prevailing ERISA definition of fiduciary, the DOL has recently issued a proposed regulation that would expand the conditions under which consultants, advisers and others who provide investment advice to retirement plans can be considered fiduciaries. Today’s fiduciary standard was developed under the DOL regulations shortly after the passage of ERISA. The current regulatory environment has severely lagged the marketplace, as a lot has changed in the retirement industry since 1974. Foremost is the transition from defined benefit plans to 401(k)s (and other participant directed plans) becoming the preferred retirement funding vehicles.

Current Rule

ERISA Section 3(21) delineates what functions translate into a fiduciary role within an ERISA covered retirement plan. It states that, other than when discretion exists or control of plan assets is exercised, a multiple part test must be satisfied for advice to reach a fiduciary standard. The advice service must be provided for a fee and the following must be met:

  • Given as to the value or suitability of investing in property or securities; and
  • Provided on a regular basis; and
  • Made pursuant to a mutual agreement, understanding or arrangement of both parties;  and
  • Serve as the primary basis for plan investment decisions; and
  • Individualized for the plan.

The present 35 year old regulation is overly narrow and serves to shield many advice providers from a fiduciary role for their services. What results is, what critics call, a system that harms plan sponsors and their participants.

Proposed Rule

The proposed regulations simplify the current five-part test by significantly expanding the categories of services resulting in a fiduciary act. If passed, this would inflate the number of consultants and advisers that are liable for their advice to retirement plan sponsors. As more services would be considered fiduciary acts, an elevated fiduciary standard would be required or more advice providers. In the proposed definition, fiduciary status for investment advice is reached when a person provides a plan, a plan fiduciary or a plan participant with:

  • Advice or appraisal of the value of securities and other properties, or
  • Recommendations as to the advisability of investing in securities or other properties, or
  • Advice or recommendations as to the management of securities or other properties.

Additionally, the person must also meet at least one of the following conditions:

  • They represent or acknowledge that they are acting as a fiduciary
  • They are a fiduciary by reason of having discretionary authority or exercising control over plan assets;
  • They are an investment adviser as defined in the Investment Advisers Act of 1940;

Significant Changes

A significant change to the regulation is that advice is no longer required to be provided on a ‘regular’ basis. Further, the advice does not have to serve as a primary basis for plan investment decisions.


The regulations clarify that fees resulting from advisory services offered to a plan would include commissions emanating from brokerage, mutual fund and insurance sales; and would include commissions based on multiple transactions involving different parties

Plan Distribution Advice

The DOL also made clear that fiduciary standing “may result from the provision of advice or recommendations not only to a plan fiduciary, but also to a plan participant or beneficiary.” Previously, the DOL took the position that participant distribution recommendations did not trigger fiduciary status. Retirement distribution services have been hotly debated, as many hold concerns that participants may not be adequately protected from advisors that subordinate participants’ interest to their own financial gains.


These new regulations have caused quite a stir in the advisory community. Wall Street brokerage houses, large consulting organizations, advisory firms and other interested parties will be greatly affected, causing many advice providers to restructure their ERISA services or be relegated to a non-fiduciary role for their plan sponsor services. Many of these same organizations have historically evaded fiduciary responsibility and maintained conflicted practices that are not consistent with a fiduciary stance. These changes will ultimately serve to clean up many of the questionable business practices that still plague the retirement consulting industry.

Plan sponsors also have work to do. Equipped with this information, it is advisable for sponsors to reevaluate their advisory relationships. Properly exercised due diligence on the fiduciary role of their advice providers should yield a clear, accountable, higher value service – free from tainted advice.

DOL Issues Final Rules on Participant Fee Disclosure Requirements

The Department of Labor published its final rule on participant fee disclosure, Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans, on October 18, 2010. This initiative is the final step in the department’s three-pronged, multi-year program to increase fee transparency for defined contribution plans.  The first was the DOL’s revision of the Form 5500 to identify plan fees. The second was enhanced service provider disclosure to plan sponsors of direct and indirect compensation and potential conflicts of interest that may affect their objectivity. (As discussed our Fall 2010 Fiduciary Commentary). With these initiatives, it is clear that the DOL will make disclosure of plan fees a key item on their enforcement agenda in the future.

The regulations mandate plan and investment expense information be provided to plan participants. The new disclosures will reveal information that was previously not required. All plan participants, regardless of plan size, will receive this information beginning in plan years on or after November 1, 2011 (e.g., for calendar year plans, the plan year beginning January 1, 2012).

The highlights of the new rules are:

  • Administrative Expenses: The rules require the disclosure of how fees are charged (i.e. on a per participant or on account balances basis). This should bring to light the fact that participants with larger account balances often bear a proportionately larger burden of plan fees than investors with smaller account balances. Administrative fees include costs for general plan services such as recordkeeping, legal and accounting.
  •  Revenue Sharing Payments: The rules do not require the disclosure of revenue sharing from the plan’s investments. In a compromise with the industry, it was determined that this potentially confusing economic arrangement did not need to be detailed.
  • Benchmarking: Investment returns must be compared to a broad-based market index. The rule also allows the mix of multiple market indexes for investments with a combination of equity and fixed income exposure (i.e. Target Date Funds).
  • Investment Turnover: All plan investments (with the exception of employer stock funds and stable value funds) must calculate and disclose their portfolio turnover. This is an interesting development, as the true costs associated with buying and selling securities can be substantial. Nor are they included in an investment’s expense ratio, as frequently thought.
  • Timing: Participants must also receive statements regarding fees at least quarterly. The statement must depict the dollar amount of the plan fees charged or deducted from their individual account with a description of the services charged for.

Additionally, the investment related disclosures must be presented in a chart to facilitate a comparison among the plan’s investment alternatives.

Regulatory compliance for the participant disclosure rules represent a marked improvement from the most recently proposed 408(b)(2) regulations (where currently the burden is on the plan sponsor to insure they received all the required disclosures from their service provider). In contrast, this proposal allows the plan sponsor to rely on its service provider to fulfill all participant disclosures.

As many industry studies have revealed, most plan participants are simply not aware of their retirement plan fees. The effect of the new rule (and the two prior fee disclosure initiatives) is to provide greater participant fee transparency and to enhance the ability of companies to identify and  benchmark their fees. The DOL believes that with this new information, participants will be better equipped to make informed investment decisions.

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Many Americans have Yet to Face Reality Regarding Retirement

nest eggNyhart Inc., an actuary and employee benefits consultant, recently conducted a six-month study reviewing nearly 10,000 participant retirement accounts at 110 public and private companies. Not surprisingly, this study, like so many others, found that participants are tragically under prepared to retire.

According to the study, today’s average participant [relying solely on their 401(k)] will not have adequate savings to retire at age 65. In fact, now it is estimated to take until the age of 73 to accumulate ample savings to live securely in their golden years.

A study by Wells Fargo revealed a perplexing outlook concerning participant’s confidence in their ability to retire comfortably. Of those in their 50s, 56% were “confident or very confident” they will have the means to support the lifestyle they wish in retirement. Unfortunately, the facts don’t support their perspective. The median retirement savings of those respondents was just $29,000.

Shouldn’t Americans have realized by now that saving for retirement is a DIY undertaking?  Additionally, we are seeing more and more workers who are skeptical of Social Security’s ability able to provide for them through retirement. According to the Wells Fargo study, only 40% of those surveyed believe Social Security will be available throughout their retirement. So why don’t participants save more? Wells Fargo’s Laurie Nordquist, Executive Vice-President and Director of Institutional and Trust Services, got it right when she observe, “Too many Americans have their heads in the sand in the face of obvious savings deficits.”

Increasing a participant’s contribution rate is the obvious place to start. Individual deferrals are the single most powerful factor in determining financial success in retirement. As well, individual deferrals are generally within one’s power to control.  While younger workers obviously have a better shot of being able to address their retirement savings challenges, nearly 70% of them run the risk of needing to defer retirement at their current level of savings, according to Nyhart. The study found that the number of workers under 30 who would be able to retire at 65 would double if they simply increased their deferrals by 4%.

For many older participants that have failed to save adequately during their working years, increased savings may be too little too late. The Nyhart survey found that many of those ages 55 and above would need to contribute over 45% of their income to retire in 10 years. For workers between 45 and 55, contributions would need to average 19% of their income to retire by 65. These savings rates are hardly realistic for the typical employee. Then again, perhaps retiring at 65 years old isn’t either!

A Charles Schwab study showed plan participants are likely to choose the plan’s match ceiling as their savings deferral level in order to maximize the employer contributions they receive – but no more. Similar findings were gathered in the Wells Fargo study, where 85% said they maximize their contributions up to their employer’s match ceiling.

A straightforward and workable response to address participant deferral challenges is for employers to reassess their current match formulas. We know that engaged participants will likely do all they can to maximize the contributions they receive from their employer. Lengthening a standard match formula may drive participant deferrals to levels that approach the new match ceiling without incurring additional matching costs. For example, a 50% match on the first 6% of contributions elongated to say a 25% match up to 12% may yield measurable savings improvements.

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The Bruce Sallan Radio Show With Jim Scheinberg

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