If It Quacks Like A Fiduciary

The Department of Labor woke up from its 36 year coma and realized that the definition of fiduciary under ERISA is no longer working.

The Department of Labor will implement a regulation to update the definition of “fiduciary” to more broadly define the term as a person who provides investment advice to plans for a fee or other compensation. It would broaden the definition of “fiduciary” to further protect 401(k) participants from conflicts of interest, such as investment advisers recommending an option that brings in higher fees or promotes their own firm’s funds.

The 401(k) industry is littered with many brokers and insurance salesman pushing their own product at the expense of their clients and other providers like payroll companies who offer menus of funds, but disclaim any fiduciary role.

If a retirement plan advisor offers investment advice, they are a fiduciary, no matter how much they will disclaim that role in their contractual relationship with their plan sponsor clients. So while the client may be barred contractually from suing their advisor for a fiduciary breach, it will not deter from the Department of labor seeking action.

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3 Responses to If It Quacks Like A Fiduciary

  1. Pingback: Tweets that mention If It Quacks Like A Fiduciary | The Rosenbaum Law Firm P.C. Blog -- Topsy.com

  2. Mike Hughes says:

    “So while the client may be barred contractually from suing their advisor for a fiduciary breach, it will not deter from the Department of labor seeking action.”

    And, it seems like the contractual language might be void as well! See ERISA 410:

    Sec. 1110. Exculpatory provisions; insurance

    (a) Except as provided in sections 1105(b)(1) and 1105(d) of this
    title, any provision in an agreement or instrument which purports to
    relieve a fiduciary from responsibility or liability for any
    responsibility, obligation, or duty under this part shall be void as
    against public policy.
    (b) Nothing in this subpart \1\ shall preclude–
    —————————————————————————
    \1\ So in original. This part does not contain subparts.
    —————————————————————————
    (1) a plan from purchasing insurance for its fiduciaries or for
    itself to cover liability or losses occurring by reason of the act
    or omission of a fiduciary, if such insurance permits recourse by
    the insurer against the fiduciary in the case of a breach of a
    fiduciary obligation by such fiduciary;
    (2) a fiduciary from purchasing insurance to cover liability
    under this part from and for his own account; or
    (3) an employer or an employee organization from purchasing
    insurance to cover potential liability of one or more persons who
    serve in a fiduciary capacity with regard to an employee benefit
    plan.

  3. Timothy Yee says:

    This reminds me of the old debate about commissions versus fees. The line was that a commission broker would act unethically/ not in the client’s interests because that broker had to sell something to get paid. The fee advisor was able to provide advice and all kinds of choices because the fee advisor would always act in the client’s best interests.

    Having seen both sides of the table in 21 years, an unethical person will act unethically in all circumstances, regardless of mode of compensation. And that person should be held accountable for those actions.

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