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
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
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
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.