The Department of Labor (DOL) is proposing a rule change that would classify the brokers of retirement plans as fiduciaries. If approved, retirement brokers would be subject to the Employee Retirement Investment Security Act of 1974 (ERISA), including the requirement that they act in the best interest of their client.

Analysis from the White House put pressure on the DOL to reevaluate the classification of investment brokers. In a controversial report released in February 2015, the White House Council of Economic Advisers estimated $17 billion of investor funds are lost annually because of conflicted investment advice. The changes are designed to create additional safe guards for investors who use investment advisers to direct their 401(k) or Individual Retirement Account (IRA) plans.

This is not the first time the DOL proposed a revamp of the fiduciary definition. It suggested a similar measure in 2010, but withdrew it after receiving criticism from the investment industry. A similar pushback is expected for this revision as well; the Securities Industry and Financial Markets Association has called into question the validity of the financial data analysis in the oft-quoted February 2015 report.


ERISA charges fiduciaries with responsibilities to the plan participants and beneficiaries. They must diversify plan investments, pay reasonable plan expenses and carry out duties prudently. Additionally, they are prohibited from engaging in certain transactions that would harm the plan. If fiduciaries do not follow the necessary conduct, ERISA holds them liable for plan losses.

ERISA classifies fiduciaries as anyone who gives investment advice about plan assets or has the authority to do so, for a fee. A five-part test provides more specificity about what this means:

  1. The adviser must make recommendations for investing that include the purchasing, or selling of securities or advise on the value of securities.
  2. Investment advice must be provided on an ongoing, regular basis.
  3. The advice is given on the condition that the investment broker and the investor mutually understand it.
  4. The broker's advice is the primary basis for the investor's investment decisions.
  5. The advice is tailored to address the individual plan.

Investment brokers often fail to meet the five-part test, which scopes them out of the current fiduciary definition. The DOL raised concerns that without the restrictions placed by the fiduciary role, investment brokers could operate in their own financial interest, not the interests of the plan, when providing advice about plan investments. They would also not be liable for any harm that fell to the plan based upon their recommendations.

Overview of Proposed Changes

The DOL proposes that investment advisers receiving compensation for their services should be considered fiduciaries if:

  1. They provide investment advice, recommendations or appraisals to a plan fiduciary, participant or beneficiary, and
  2. They acknowledge either that they are providing advice tailored to help with plan investment decision-making or the fiduciary nature of the advice.

The proposal specifically excludes general investment education from investment advice in the fiduciary consideration. Sales pitches to financial experts, appraisal and valuations of stock held by employee-stock ownership plans are also carved out of this consideration.

Certain elements of the fiduciary status may present problems for the investment advisers' business models. For example, revenue sharing or commission based on plan performance, both common in the industry, may be considered prohibited transactions under ERISA. The new fiduciary definition would create an exemption for investment advisers who agree to certain terms. Under the best interest contract exemption, if advisers agree to comply with their responsibilities as a fiduciary, the compensation practices listed above will not be considered prohibited transactions.

What Comes Next

Once published in the Federal Register, the proposed changes will have 75-day public comment period. The DOL will consider the feedback and if any modifications to the proposal need to be made before publishing the final standard.

For More Information

If you have any specific questions, comments or concerns about how the proposed change to the definition of fiduciary could affect your organization, please contact Hal Hunt, MHM's National Employee Benefit Plan Practice Leader, or your MHM service professional. You can reach Hal at or 816.945.5610.

Published on April 28, 2015