Who is a Fiduciary? DOL Proposal Expands Definition

Submitted by Firm:
Bond, Schoeneck & King, PLLC
Firm Contacts:
Louis P. DiLorenzo, Thomas G. Eron
Article Type:
Legal Update

The U. S. Department of Labor (DOL) issued a regulation in 1975 defining the circumstances under which a person providing "investment advice" is to be treated as a fiduciary under the Employee Retirement Income Security Act (ERISA). Much has changed in the 40 years since then. Section 401(k) of the Internal Revenue Code did not exist in 1975, and most individual account plans were then managed by corporate or individual trustees appointed by the plan sponsor. Furthermore, most plan administrative expenses were paid by the sponsor. Today’s Section 401(k) and 403(b) plans have become the primary retirement vehicles for employees and self-employed persons; participants are given investment choices among funds chosen by the plan; and most administrative expenses are charged directly or indirectly against participant accounts. In light of these significant changes, the DOL has proposed expanded new rules to define who is a plan fiduciary and to sanction fee arrangements that would otherwise be precluded under ERISA’s prohibited transaction rules.

Under the DOL’s proposed rule, a person is deemed to be a fiduciary if the person (1) provides investment or investment management recommendations to an employee benefit plan, a plan fiduciary, participant, or IRA owner, and (2) either (a) acknowledges the fiduciary nature of the advice, or (b) acts under an agreement or understanding that the advice is individualized to the person or plan receiving the advice in making the investment or plan management decisions. The new definition will treat many more persons as fiduciaries as compared to the 1975 regulation that it will replace.

At the same time, the DOL has proposed revisions to several prohibited transaction exemptions and a new Best Interest Contract Exemption. These new exemptions will continue to permit traditional compensation arrangements that have existed for service providers to ERISA plans and IRA’s, while at the same time requiring that these providers acknowledge their fiduciary status and provide advice in their client’s best interest.

Earlier exemptions from the prohibited transaction rules and excise taxes were specific exemptions requiring compliance with technical requirements for each exemption. In addition to amending the existing exemptions, the new "Best Interest Contract Exemption" is a broader principle-based exemption that will continue to allow common arrangements for revenue sharing and asset-based compensation. To qualify under the Best Interest Contract Exemption from ERISA’s prohibited transaction rules, the advisor or consultant must (i) acknowledge fiduciary status, (ii) commit to providing advice in the client’s best interests, (iii) warrant the adoption of policies designed to mitigate conflicts of interest, and (iv) clearly disclose all conflicting interests such as revenue sharing, commissions, and other fee arrangements that might compromise the advisor from providing advice in the client’s best interest. The new rules are extended to IRA’s, including rollover IRA’s.

These 2015 proposals from the DOL reflect a change from proposals made in 2010 to the fiduciary definition that were met with a great deal of push-back from financial institutions. The new proposals were developed following what the DOL describes as years of work with a broad range of stakeholders. The proposal will undoubtedly generate further discussion and debate before they are finalized.

The full text of the DOL proposals, news releases, FAQs, and other information can be found at the DOL’s Employee Benefits Security Administration website: under the heading "Conflicts of Interest Proposed Rule." Further information is available in a DOL fact sheet that can be found at:

Stay tuned for further developments. It is likely that both plan sponsors and IRA holders will be hearing a lot more from the financial institutions and other service providers for these arrangements.