DOL should go slow on fiduciary update

In its zeal to improve protection of retirement plan participants from bad advice and conflicts of interest, the Department of Labor is proposing a rule change that, though well-intended, is too broad and may leave some participants more vulnerable than they already are. The proposal would change the five-part test that the department has relied upon for the past 35 years to determine who qualifies as a fiduciary under the Employment Retirement Income Security Act of 1974. Essentially, it would assign fiduciary status to any individual providing advice to a plan or its participants for a fee or other compensation. Unlike the existing rule, a firm or adviser would be deemed a fiduciary even if they offered that advice on a one-time basis. The DOL deserves kudos for recognizing the limitations of its current definition of “fiduciary” and for proposing a meaningful solution to the problem. We wholeheartedly support the department's efforts to ensure that people who provide personalized investment advice to plan fiduciaries and participants are held to rigorous fiduciary standards. However, we are worried that the DOL proposal goes too far, and that fear of fiduciary liability would discourage advisers and broker-dealers from providing plan sponsors and participants with general investment-oriented advice or education. If that were to happen, it would be particularly detrimental to smaller investors who routinely look to discount brokers and broker-dealers for generic advice and counsel about their retirement accounts. In order to ensure that smaller investors continue to have access to general retirement guidance, we support a recommendation put forth by the ERISA Industry Council that the DOL's final regulation include a safe harbor for advisers whose principal responsibilities do not include providing investment advice. These advisers, the council said, should not be treated as fiduciaries so long as they indicate verbally, or in writing, the scope of their role, that they are not investment advisers and are not undertaking to provide advice.

DOL RESPONSE

The DOL, for its part, dismisses the financial services industry's concerns that smaller investors would not have access to generalized advice, or education, as a “business decision” on the part of the service providers. “Their assumption is that the only way to give advice is through an investment advisory relationship, and I am not sure that's true,” Assistant Labor Secretary Phyllis Borzi told InvestmentNews' editorial board last week. “We want people to have advice,” said Ms. Borzi, who heads the Employee Benefits Security Administration. “But we want people to be able to rely on that advice and not worry whether that advice is best for them or for the person giving the advice.” We are also concerned that the department's proposal gives short shrift to the costs that service providers who unwillingly assume the role of fiduciaries are likely to pass through to plans. Those costs likely would come from higher legal, compliance and training expenses, not to mention the premium that service providers undoubtedly would impose for their exposure to new legal risks.

COMPETING DEFINITIONS

Finally, we're worried that the DOL's vision of a fiduciary will differ significantly from that of the Securities and Exchange Commission, thereby further confusing investors and putting financial services firms in the awkward position of having to comply with two different standards. Ms. Borzi made it clear that the DOL is working closely with the SEC to make sure the two definitions of “fiduciary” are in sync in instances where their application is likely to overlap. But she offered no guarantee that the DOL and SEC will come out with a uniform standard of care. While the DOL hopes to pass a final ruling by the end of the year, we urge the department to lift its self-imposed deadline in order to consider more carefully any unintended consequences that may result from defining the meaning of “fiduciary” too broadly. Given that the DOL's existing definition has gone unchanged for 35 years, it seems more will be gained than lost by proceeding cautiously.