Currently, some advice, however conflicted, is seldom actionable
Pensions & InvestmentsBy Phyllis C. Borzi
April 18, 2011, 12:01 AM ET
Image via WikipediaPension plans and participants routinely depend on experts for guidance in making important investment decisions. They turn to these investment professionals for reliable advice on how best to manage and safeguard retirement assets. Most would assume that these experts give their advice as fiduciaries, obligated to act with prudence and undivided loyalty to the plans' financial interests, rather than in their own interests — and that's exactly what the Employee Retirement Income Security Act of 1974 provides. However, a regulation issued in 1975 by the Department of Labor substantially narrowed the statutory fiduciary definition, making it far too easy for today's advisers to avoid fiduciary responsibility. We are now working to update this rule.
John DeanPhyllis C. Borzi is assistant secretary of labor for the Employee Benefits Security Administration, Washington
So much has changed over the last three decades and the concepts and interpretations developed long ago often need to evolve or they risk becoming irrelevant. … The department's plan to update its 36-year old fiduciary regulation is necessary to ensure its relevance in today's environment of participant-directed investments.
… ERISA provides that a retirement plan fiduciary must act with prudence and undivided loyalty to the participants in that plan. Among other things, the law says that anyone providing investment advice for a fee, either direct or indirect, is a fiduciary. The department's 1975 rule restricted this definition by creating a five-part test for the definition to be met. At the time, … 401(k) plans didn't exist and individual retirement accounts were just starting up. Now the majority of retirement plan assets are in 401(k) plans where participants shoulder most of the investment responsibility, regardless of their financial sophistication. Additionally, IRA assets now exceed those in 401(k) plans. As a result, good investment advice is in greater demand, both by participants and by the plan sponsors who select plan investments.
Among the key elements of the five-part test was the requirement that the advice had to be given on a regular basis and that it had to be given pursuant to a mutual understanding that the advice would be the primary basis for the investment decision. This means that advice given infrequently, however flawed or conflicted, is seldom actionable by the department. … Moreover, unless both the plan official and the adviser understand that the advice serves as a primary basis for the investment decision, advisers who base their advice on their own financial interests rather than the plan's can't be held accountable under ERISA for the resulting losses.
Consequently, plan sponsors and participants are often left holding the bag for damages caused by conflicted advice, even in cases where the adviser might have represented that the advice was covered under ERISA. Plan officials who relied on that advice, as a result, are often the sole targets of legal actions that may follow.
… Plan sponsors hire their advisers with the expectation that the advice will be free of conflicts of interest and that these advisers will be held to the same legal standard of care that any fiduciary would.
To fix this problem, we have proposed a new rule that more closely reflects Congress' decision in 1974 as to when investment advisers are “fiduciaries” to the plans they serve. The new rule would remove the “regular basis” and “primary basis” requirements to give added protection to both employees who participate in retirement plans and to the businesses that offer them. ...
Image via WikipediaIn developing this rule, we are working collaboratively with the Securities and Exchange Commission and the Commodities Futures Trade Commission to harmonize our respective regulatory activities. We want to ensure that compliance with one regulatory regime does not create violations of the other. … We also have broad authority to issue exemptions from ERISA's prohibited transaction rules, so we can make sure that beneficial advice practices are permitted, even if they would otherwise be technical violations of the statute. While we recognize that most advisers act in good faith, the new rule would permit us better to protect plans from abusive practices and to address them when they occur. We will, however, continue to evaluate the scope, terms, conditions and exceptions in the proposed rule to ensure that the final regulation is as clear and effective as possible, and to make sure that we avoid any unintended consequences. Our actions will benefit America's businesses and their employees nationwide. The proposed rule would hold financial professionals who present themselves as expert purveyors of investment advice more accountable for that advice, allowing plan sponsors to be secure in the knowledge that outside advisers are giving them the best possible guidance. Shouldn't advisers who provide such crucial advice be held to the same standard of care as those who are paying them for it?
Phyllis C. Borzi is assistant secretary of labor for the Employee Benefits Security Administration, Washington.
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