Will the Department of Labor Find the Missing Fiduciary Link?

Abstract

Within 90 days, the Department of Labor (DOL) will substantially expand the definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA). In large part the traditional five-part test from 1975 has been discarded, and some form of the new two-prong test will become the rule. The proposed regulations are the first such changes in almost 35 years and will drastically change the relationship of investment advisors and entities with plan sponsors subject to Title I of ERISA or plans, persons and entities subject to Sec. 4975 of the Internal Revenue Code of 1986 (among other amendments, ERISA added Code Sec. 4975 imposing an excise tax on certain “prohibited transactions.” The prohibited transactions described in Code Sec. 4975 are substantially similar to prohibited transactions contained in ERISA. Such prohibited transactions will greatly increase under the DOL’s proposed rule). The DOL has a unique opportunity to advance the view that the sole interest rule is unsound, particularly in this investment advisory context, and propose how it should be modernized. Furthermore, the present prudent-person rule should be updated by entitling a trustee to seek and to pay for investment advice but then inalterably devising the trustee as financial guarantor for any breaches committed by the investment advisor. In addition, the exclusive-benefit rule precludes employers from being beneficiaries under ERISA. As a result, courts have been forced to indulge in pretense, such as the notion that benefits to employers are merely “incidental,” in order to reconcile ERISA with the economic realities of who is the beneficiary and to what extent. Moreover, the proposed rule should not apply to individual retirement account rollovers, at least until these other changes have been properly incorporated into the investment, regulatory and judicial environs. This article concludes by providing such a DOL proposal in a final form.