On October 21, 2010, the Department of Labor (the “DOL”) announced a proposed rule to significantly expand the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974 (“ERISA”) to include any person who provides investment advice to an employee benefit plan (or such plan’s participants or beneficiaries) for a fee or compensation. The DOL noted that significant changes had occurred in the investment advice industry necessitating changes to the definition of fiduciary, which has been in place for over 35 years. It further noted that many plan fiduciaries rely on impartial advice from consultants, advisers, and appraisers, many of which would not be considered “fiduciaries” under the existing regulations and therefore, not subject to the same conflicts of interest constraints imposed on fiduciaries under ERISA.
The proposed rule, if adopted in its current form, will cause substantial changes for plans, current plan fiduciaries, and for plan service providers. For example, the DOL previously issued an Advisory Opinion stating that a valuation of closely-held company stock was not investment advice under the existing regulations, thus the appraiser would not be a fiduciary if it was only providing an appraisal. Under the proposed rule, a person retained by a plan fiduciary to provide an appraisal or fairness opinion on the value of securities, real estate, or other property would be an ERISA fiduciary.
Another example of the expanded definition of a fiduciary under the proposed rule is that investment advice would include making recommendations to a plan participant or beneficiary (as well as to a plan or a plan fiduciary) as to the advisability of investing in, or holding, securities or other property. The DOL has requested comments on whether, and to what extent, recommendations related to taking a plan distribution would be considered investment advice within the scope of this expanded definition of a fiduciary.
As currently drafted, the proposed rule would dramatically impact service providers and could increase plan costs (e.g., it could increase the cost of an independent stock valuation for closely-held stock in an employee stock purchase plan or ESOP). In addition, the proposed rule could create co-fiduciary issues for current plan fiduciaries who are unaware of the actions of these “newly created” fiduciaries.
The Proposed Rule can be obtained by clicking here.