Insights

The Definition of “Fiduciary” Under ERISA

 

 

By Elaine Reardon, Ph.D.

 

The Department of Labor is considering expanding the definition of “fiduciary” under ERISA.   Since 1974, when ERISA was put into place, retirement plans have moved away from defined benefit plans and toward defined contribution (DC) plans and Individual Retirement Accounts (IRAs).  As a consequence, individuals take a greater role in planning and making their own financial decisions regarding their retirement savings, investment and drawdown.  Relatively little is known, however, about the decisions individuals make before and during retirement.   Resolution Information, in partnership with RAND, has won a substantial contract from the DOL to conduct a four-year study of the sources of information and advice DC and IRA holders receive regarding retirement savings and investments, and how their decisions evolve over time.  The study will illuminate the sources of advice people use that could potentially fall under the term “fiduciary.” 


In 2010, the Department of Labor’s Employee Benefits Security Administration (EBSA), which regulates employer-sponsored retirement plans, proposed expanding the definition of “fiduciary” under Title 1 of the 1974 Employee Retirement Income Security Act (ERISA).[1]  Under ERISA Section 3(21)(A), a “fiduciary” is someone who has the authority and/or responsibility to provide investment advice under a retirement savings plan and is compensated for doing so.  Fiduciaries must provide impartial and unbiased advice in good faith.  Fiduciaries can be sued for losses that occur due to a violation of their fiduciary duty.  EBSA adopted a five-part test defining who is a fiduciary.  Investment advice relationships that are considered fiduciary with regard to ERISA are those which:

 

  1. “Render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing or selling securities or other property
     
  2. On a regular basis
     
  3. Pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary, that
     
  4. The advice will serve as a primary basis for investment decisions with respect to plan assets, and that
     
  5. The advice will be individualized based on the particular needs of the plan.” [2]

 

 

The proposed change to the regulation would remove the “regular basis” requirement, such that a one-time recommendation can be considered to fall under the fiduciary definition.  Advice to a plan fiduciary, for example, regarding an investment decision would be included.   It would also cover advice that was considered regarding investment decisions even if it was not the “primary basis” for the decision.  However, someone selling a product and who did not represent themselves as a disinterested advisor would not be considered a fiduciary.  In September 2011, EBSA announced that it intended to re-propose the redefinition of fiduciary in response to public and Congressional input.[3]


Much has changed since ERISA was put into place.  As noted above, defined benefit plans were more common and employees were much less likely than they are now to participate in defined contribution (DC) plans and hold Investment Retirement Arrangement (IRA) accounts.  This in turn means that individuals face more demands in terms of planning, investment and savings.  The research, however, is not in place that would clarify how DC participants and IRA holders plan for retirement, how closely they hew to a strategy, how they determine a strategy and how often it changes.  The extent to which they rely on informal sources for advice as well as formal investment advisors, and who then may fall under the revised definition of fiduciary, is likewise not well understood.  It is also not clear what cognitive biases they might hold that cause them to deviate from a retirement path that standard economics would suggest is best for their circumstances.   


Resolution Information and RAND have partnered in a four year study designed to address these holes in the research.  Repeated surveys will collect data on retirement planning, advice interactions, confidence in retirement preparations and related topics.  Study participants will also share the account statements, disclosures and other documents provided to them by their retirement plan or service providers to their retirement plan or IRA.  The study’s focus is on the information that individuals receive and how they use this information to make decisions regarding saving, investment and drawdown.  The study is intended to provide policy-makers and researchers valuable information to guide future research and policy.

 

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[1] “Definition of the Term ‘Fiduciary’,” Proposed Rule, Federal Register, Vol. 75, No. 204 (October 22, 2010), pp. 65263 - 65278.

[2] “Definition of the Term ‘Fiduciary’,” Proposed Rule, Federal Register, Vol. 75, No. 204 (October 22, 2010), p. 65264.

[3] “US Labor Department’s EBSA to re-propose rule on definition of a fiduciary,” EBSA News Release, September 19, 2011.  Release Number: 11-1382-NAT.  http://www.dol.gov/opa/media/press/ebsa/EBSA20111382.htm

 

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