Last week, the Employee Benefit Security Administration of the Department of Labor (DOL) held a hearing to review newly proposed regulations that would greatly expand the circumstances in which an individual who provides investment advice to a benefit plan or its participants becomes a fiduciary under ERISA. This hearing followed after individuals and industry groups raised a series of concerns that the proposed regulations would increase the cost and risk of delivering investment advice to plans and their participants.

The Proposed Change

  Since its enactment in 1974, ERISA’s definition of “fiduciary” includes individuals who provide “investment advice for a fee or other compensation” to benefit plans or their participants. The DOL’s existing regulations (in place since 1976) limited this provision to only cover investment professionals who provided “regular” investment advice that served as the “primary basis” for a plan’s investment decisions. See 29 C.F.R. § 2510.3-21(c).

Under the DOL’s newly proposed regulations, any individual who provides any advice regarding the “value, management or purchasing or selling of securities” to an ERISA plan becomes a fiduciary, even if that advice was not delivered on a “regular” basis or it was not the “primary” reason for the plan’s investment decision. This rule would also apply where an investment professionals provides advice to a participant in an ERISA plan regarding investments in a defined contribution plan, like a 401(k) plan. See Definition of the Term “Fiduciary”, 75 Fed. Reg. 65,263 (Oct. 22, 2010).

The potential consequences of becoming an ERISA fiduciary could be serious. For example, an investment professional would be subject to ERISA’s fiduciary standards, which require the professional to act (among other things) prudently, loyally, and in the best interests of the plan and its participants. More critically, the investment professional would be subject to ERISA’s arcane prohibited transaction rules – a series of absolute prohibitions on various transactions that apply regardless of how reasonable or beneficial they might be to the plan. Under section 406(b)(3) of ERISA, an investment professional would arguably be precluded from receiving any personal benefit “in connection with a transaction involving assets of the plan.” These provisions could, in some circumstances, make many well-established forms of compensation received by investment professionals problematic.

Further, an analyst providing an appraisal for an ESOP would be subject to the proposed definition. This raises the question of whether the analyst can provide an independent appraisal of the employer securities and at the same time be a fiduciary acting in the best interests of the plan’s participants. (At last week’s hearing, the DOL indicated it did not see this as a conflict.)

Provider Reaction

Not surprisingly, the DOL’s proposed regulations set off a significant reaction. Following the DOL’s announcement of last week’s hearing, the DOL received no less than 39 written requests to provide testimony, and 199 written comments, which are available here.

The letters express a number of concerns, including that the proposed definition:

  • Was ambiguous as to the circumstances in which broker-dealers would become fiduciaries when selling securities to a plan.
  • Could subject those selling bundled services to a defined contribution plan to ERISA's fiduciary rules.  
  • Would be read to cover professionals (such as actuaries, financial consultants, accountants, and attorneys) who have historically not been fiduciaries.  
  • Would increase the cost charged to plans for services (due to potential fiduciary liability).  
  • Would harm ESOPs, due to new provisions that would make fiduciaries those who value ESOP stock.  
  • Generally, was unclear and could lead to confusion.  

While the volume of the comments makes it likely that the proposed regulations will ultimately be revised at least to some extent, its is also highly likely that new regulations will expand the conditions under which an investment professional and other professionals will be a fiduciary under ERISA.


The DOL has not yet amended the existing definition of fiduciary, but is moving forward with the rulemaking process. We will send updates as this process continues, and will provide a more detailed analysis when the rule in finalized. In the meantime, please contact us if you have any questions regarding these proposed changes.