Who's Holding Your Piggy Bank?Acting on reaction to a proposed and subsequently withdrawn regulation from October 2010 and attempting to address concerns expressed by both interested parties to the initial proposed regulation and an economic analysis by the Council of Economic Advisors (that the Investment Company Institute considers flawed), the Department of Labor has issued a new proposed regulation expanding the definition of investment advice. The DOL’s stated purpose in doing so is to protect retirement plan and IRA investors from practices engaged in by some advisors whose interest in providing investment advice is conflicted and not in the best interest of the participant or IRA owner.

The proposed rule does not expand the definition of fiduciary per se, but instead it expands the areas of advice that are rendered by ERISA fiduciaries and covers most significantly investment recommendations, investment management recommendations and recommendations of parties who provide advice for a fee or manage plan assets. This has the effect of expanding the net to cover more advisors as fiduciaries. People who provide advice in these areas will fall under the ambit of “fiduciary” in the following situations:

  1. They represent that they are acting in a fiduciary capacity; or
  2. The advice they give is provided pursuant to an agreement, arrangement or understanding that the advice is individualized and directed to the plan participant or IRA owner for consideration in making investment or investment management decisions pertaining to the plan’s assets.

There are a number of specific and important carve-outs to the new rule generally intended to address the concerns expressed by the business and financial communities as well those expressed by a number of Members of Congress. We will address the carve-outs in follow-up posts.

The impact of the new rule is to cause brokers and insurance agents who render advice to plan participants and IRA owners to do so in compliance with ERISA’s fiduciary standard rather than the “suitability” standard under which they render advice today. The DOL’s position is that the suitability standard is not sufficient to prevent the rendering of conflicted advice that it believes costs retirees billions of dollars in inappropriate fees. The brokerage industry contends, in part, that the cost of compliance with the new rule, the enhanced risk of litigation, and the fact that fees must necessarily be higher to provide advice on an individual basis make the rule unworkable and that small plans and small investors will lose the ability to obtain investment advice and to continue to work with a trusted advisor. At a minimum, compliance with the new rule is expected to alter the way that brokerage houses do business.

Another concern that would impact all fiduciary advisors rendering advice to a plan on a fee basis that is not level is that they would engage in a prohibited transaction should they provide advice to a participant about rolling over her account to an IRA unless they enter into a complex Best Interest Contract to be discussed in a later blog. One contention is that this would tilt the playing field by giving advisors charging level fees to the plan an unfair business advantage.

There is now a 75-day comment period, and lines for and against the rule have generally been drawn. It’s possible that the new rule might be modified in response to comments, but the Administration is bound and determined to get the regulation finalized sooner rather than later.