Magazine

Compliance Consult | PLANADVISER July/August 2014

Definition of ‘Fiduciary’

Are you a fiduciary?

By editors@assetinternational.com | July/August 2014
Art Dadu Shin

Knowing whether you are a “fiduciary” as defined by the Employee Retirement Income Security Act (ERISA) is a compliance fundamental for advisers and brokers that provide services to ERISA-covered plans and individual retirement accounts (IRAs). In recent years, attention to the controversial Department of Labor (DOL) proposal to amend the rules that define what constitutes the type of “investment advice” that results in ERISA fiduciary status may have obscured attention to the current fiduciary definition. Since the DOL has further delayed the investment advice rule proposal, until January 2015, it is worth noting some key points about the ERISA fiduciary definition currently in effect.

Investment advice is not the only path to fiduciary status. ERISA’s fiduciary definition looks at whether a person performs a “fiduciary function.” He will be a fiduciary if, for example, he provides investment advice for a fee; exercises discretionary authority or discretionary control with respect to the management of plan assets; or approves benefits or expense payments. A person also can become a fiduciary by exercising authority or control over plan assets, even if not authorized to do so, for instance by embezzlement. Under this definition, an adviser or broker may exercise control over plan assets—and become a fiduciary—by having the ability to determine his own compensation for plan services or by receiving undisclosed indirect compensation for plan services.

Conduct matters under ERISA’s definition of investment advice. Facts and circumstances are as important as contract language in determining whether someone is an ERISA fiduciary. Under the DOL’s current five-part investment advice rule, a person is a fiduciary if he: (1) provides investment recommendations (2) that are individualized
(3) on a regular basis (4) pursuant to a mutual understanding that the recommendations will be a basis for investment decisions (5) for a fee.

Courts that apply this test generally consider whether a plan decisionmaker reasonably understood that he could rely on investment recommendations, and may conclude that recommendations are fiduciary investment advice even if a written plan contract fails to acknowledge fiduciary status. Courts also may not decide a fiduciary status issue until trial, after all facts are available, which makes defending against such lawsuits costly even if a defendant ultimately proves he was not a fiduciary.

Because the current fiduciary definition depends on facts and circumstances in each case, brokers and advisers who do not intend to be fiduciaries may not rely on contract disclaimers and must take care in client communications to avoid inadvertently “crossing the line” into fiduciary status.

A broker who does not receive a separate fee for providing investment recommendations can be an ERISA fiduciary. Securities brokers who do not receive a fee other than a commission for providing investment recommendations generally need not register as investment advisers. However, the DOL’s position is that any compensation, including commissions, satisfies the “for a fee” requirement under its current investment advice rule, and most courts agree.

Advisers and brokers that provide services to IRAs should be concerned about fiduciary status, even if the DOL does not finalize amendments to the definition of investment advice. The Internal Revenue Code (IRC) includes prohibited transaction provisions—under Section 4975—that are substantially the same as ERISA’s prohibited transaction provisions, and the same definition of fiduciary applies. Among other things, these rules prohibit fiduciaries from acting in their own self-interest—i.e., self-dealing—and receiving compensation from third parties in connection with plan transactions—i.e., kickbacks.

The Internal Revenue Service (IRS) is responsible for enforcing the IRC’s prohibited transaction provisions. Generally, a person who engages in a prohibited transaction must correct and pay self-assessing excise taxes. (If an IRA owner engages in a prohibited transaction, the IRA is disqualified and there is no correction.) The correction may require returning compensation to a plan if the prohibited transaction involves compensation.

If a broker or adviser is a fiduciary to an IRA, investment recommendations that result in commission compensation may involve prohibited self-dealing and kickbacks. Further, a broker or adviser may become a fiduciary if he has the ability to determine his own compensation or receives undisclosed compensation.


Roberta Ufford, a principal of Groom Law Group, has spent more than 20 years advising plans, sponsors and plan service providers, including advisers, on fiduciary responsibility issues under ERISA and related laws applying to ERISA-covered and governmental retirement and other plans. She is recognized by The Legal 500 guide for her excellence in the employee benefits and executive compensation field and often speaks before industry groups on fiduciary matters. A graduate of George Washington University School of Law, she served five years as a military intelligence officer in the U.S. Army before attending law school.