The DOL Proposed Regulations on Fiduciaries


After many years and many false starts, the Department of Labor (DOL) has issued a package of proposed regulations and prohibited transaction exemptions (PTEs) addressing who is a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA).  These proposed regulations and PTEs, if ultimately finalized as currently drafted, will make changes, some more dramatic than others, in how investment professionals deal with ERISA-covered retirement plans and Individual Retirement Accounts (IRAs).

The genesis of these proposed regulations is the DOL’s concern that plan sponsors, plan participants, and IRA holders are not being well-served by some in the investment community. The DOL believes that a subset of investment professionals are more interested in their own compensation than in serving the best interest of the plans or IRAs.

Expanding the Definition of Fiduciary

By expanding the definition of who is a fiduciary, it is apparent the DOL hopes to draw the “bad apples” in the industry under the enforcement authority of ERISA. In doing so, the DOL has complicated life for the remainder of the professionals who serve plans or IRAs.

Under ERISA a fiduciary includes any person or entity who provides investment advice for a fee or other compensation. What the proposed regulations do in this regard is to flesh out what it means to provide “investment advice,” thereby treating an investment professional or organization as a fiduciary and making them subject to ERISA’s fiduciary standards and restrictions.

Who Will the DOL Proposed Regulations Impact?

The proposed regulations will impact any investment professional or organization that works with retirement plan sponsors, trustees, plan investment committees, plan participants, or IRA owners. The impact will vary depending in many cases on how the investment professional or organization worked with plans or IRAs previously.

What Types of Retirement Plans do the Proposed Regulations Cover?

The proposed regulations cover any ERISA-covered plan, including among others, 401(k) Plans, Profit Sharing Plans, Cash Balance Plans, 403(b) Plans, Defined Benefit Pension Plans and ESOPs.

In addition, although not technically governed by ERISA, the proposed regulations cover IRAs.

What Type of Advice is Covered?

Essentially, all types of investment advice related to plans or IRAs are covered by the proposed regulations including:

  • Advice about buying, selling, or holding investments or otherwise managing investments in plans or IRAs.
  • Recommendations to take a distribution from a plan or IRA.
  • Recommendations of persons to serve as investment managers, or to provide investment advice to the plan or IRA owner.

Does There Need to be a Written Agreement to Act as a Fiduciary?

No, while a person can acknowledge or represent he or she is acting as fiduciary, or there also can be a written agreement, the proposed regulations will cover any person who renders advice pursuant to a verbal agreement or understanding that the advice being given is directed to the person or plan for consideration in making investment decisions. There are very little formalities necessary to make one a fiduciary.

Are There Any Exceptions?

There are some narrow exceptions under the proposed regulations from someone being treated as a fiduciary. These exceptions include:

  • Platform Providers – Platform Providers will not be fiduciaries. This will also include marketing and making available a platform or similar mechanism whereby a plan fiduciary can choose investments for participant-directed plans. The person making the platform available must disclose that the person is not undertaking to provide impartial investment advice or giving advice in a fiduciary capacity.

    This exclusion also protects any person working with the platform who merely identifies investment alternatives that meet the objective criteria specified by a plan fiduciary or who provides objective financial data and comparisons with independent benchmarks.

  • Investment Education – A provider of investment education will not be a fiduciary. This includes providing basic information about the terms and conditions of the plan or IRA plan, or IRA distributions, general descriptions of investment philosophies, historical, return data, estimating retirement income needs, asset allocation models, and interactive investment materials, providing none of the information provided is tailored to the individual participant or IRA owner.
  • Order Takers – A person who simply serves as order taker executing transactions on behalf of plans or IRAs will not be a fiduciary.

What is the Practical Impact?

The practical impact of an investment professional being treated as a fiduciary is the need to act in the best interest of plan participants, beneficiaries, or IRA owners and the need to avoid engaging in self-dealing or other prohibited transactions.

Investment Professionals who routinely deal with plans or IRAs are no doubt very conscious of acting in their client’s best interests from an ERISA point-of-view, as well as a Security Law point-of-view. Where such professionals may need guidance is on avoiding inadvertent prohibited transactions. Simplistically, fiduciaries may receive “reasonable” compensation for services provided; but the compensation must be reasonable. We do not have specific guidance on what is reasonable. In addition, they also must avoid self-dealing with respect to plan assets.

How Does One Avoid Prohibited Transactions?

To resolve some of these issues and to create pathways to hopefully avoiding prohibited transactions, the DOL has proposed a number of companion PTEs to facilitate compliance. The PTE that is probably applicable for most investment professionals is what is being called the Best Interest Contract Exemption.

Under the proposed PTE investment, professionals and financial institutions are permitted to receive variable compensation, including commissions (provided it is reasonable) from transactions or asset management based on the advice given by the investment professional. This PTE is available only to advice given to plan participants and beneficiaries, IRA owners, and fiduciaries of plans with less than 100 participants.

To be eligible for this PTE the professional or institution needs to enter into a written contract, which provides that the professional or institution:

  • Commits to following a “best interest” standard. This standard is essentially ERISA’s normal fiduciary standard with a duty of loyalty standard under which the institution or professional would provide advice without regard for the financial or other interests of the institution or professional. In short, give advice in client’s best interest;
  • Acknowledges fiduciary status;

  • Discloses any material conflicts of interests; and
  • Acknowledges the client has a private right with action against the institution or individuals (arbitration clauses are permitted so long as there is a right to participate in class actions).

The exemption is only available for compensation received in connection with investments in specific assets such as mutual funds, bank deposits, certificates of deposits, bank collection funds, as well as insurance company separate accounts, exchange traded REITS, ETFs, publicly-offered corporate bonds, U.S. Treasuries, certain insurance and annuity contracts, and certain exchange traded securities.

The PTE would also require notification to the DOL and certain point-of-sale disclosures involving the receipt of fees.

Will the Proposed Regulations Change How Professionals Operate?

If the proposed regulations and the proposed PTE go into effect, there will be changes in how advice is given to plan fiduciaries, plan participants and beneficiaries, and IRA owners. For many professionals who have already acted as fiduciaries and gave advice in the best interest of the client, the way they operate and give advice will probably not change. There will be additional paperwork, and probably significantly more disclosure of fees and potential conflicts of interest.


The proposed regulations may dissuade those professionals who are not skilled in ERISA matters from entering the market or may drive the marginal players out, which is probably what the DOL wants.

Plan fiduciaries, plan participants and beneficiaries, and IRA owners may find they are receiving significantly more paper and documents than in the past.

Whether in the long run the proposed regulations improve the quality of advice or reduces compliance costs, is yet to be determined.

For more information, please contact the attorney listed below.

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