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Investment Advice and ERISA Fiduciary Responsibility

May 26, 2015, Caplin & Drysdale

Last month, the Department of Labor ("DOL") published new proposed regulations (the "Proposed Rules") addressing who is a fiduciary of an employee benefit plan by virtue of rendering investment advice to the plan or its participants.[1]   As the specific details of the Proposed Rules have already generated considerable commentary, this client alert discusses the Proposed Rules in the larger context of fiduciary responsibility under ERISA.

I. Who is an ERISA fiduciary?

The Proposed Rules focus on one of three categories of persons who are defined as fiduciaries for purposes of ERISA: those who render investment advice for a fee or other compensation, with respect to any moneys or other property of a plan, or have any authority or responsibility to do so ("Investment Advice Fiduciaries").  The other two categories are persons who (1) exercise any discretionary authority or discretionary control respecting management of a plan or exercise any control respecting management or disposition of its assets, or (2) have any discretionary authority or discretionary responsibility in the administration of the plan.

Unlike the two latter categories, persons need not possess the authority to implement their investment advice in order to be Investment Advice Fiduciaries.  The Proposed Rules provide that recommendations, appraisals, fairness opinions, and individualized advice can all constitute fiduciary investment advice, subject to certain exceptions such as investment education and transactions with other plan fiduciaries who possess financial expertise.  The Proposed Rules recognize that, even though certain persons will not explicitly identify themselves as fiduciaries for purposes of ERISA, the rendering of investment advice as individualized or specifically directed to a recipient can confer fiduciary status regardless of an advisor's formal title.

II. What are an ERISA fiduciary's duties?

As noted in our April 2012 client alert "New Retirement Plan Fee-Disclosure Rules Now Finalized," ERISA imposes significant obligations on fiduciaries.  A fiduciary must act solely in the interests of plan participants and beneficiaries for the exclusive purpose of providing benefits to them, and defraying reasonable expenses of administering the plan.  A fiduciary must act with the care, skill, prudence, and diligence that a prudent person would use under like circumstances.[2]  A fiduciary must follow the lawful written terms of the plan and, as a general matter, diversify plan investments so as to minimize the risk of large losses.

The Proposed Rules do not seek to alter these high standards for fiduciary conduct, which courts have held to be well in excess of day-to-day commercial standards.  Rather, the Proposed Rules seek to expand the category of Investment Advice Fiduciaries to whom the standards apply.  Persons involved in rendering investment advice to a retirement plan should examine their existing business practices in light of the heightened obligations applicable to ERISA fiduciaries.

III. What are the consequences of breaching fiduciary duty?

The DOL monitors and enforces the compliance of individual fiduciaries with the standards described above. Enforcement may result from internal DOL initiatives or external complaints.  Enforcement action can include criminal prosecution as well as civil penalties and litigation.  Plan participants may also sue individual fiduciaries directly for breaches of fiduciary duty.  Indemnification may be available but may not cover all types of plans and/or all types of fiduciary breaches.

As above, the Proposed Rules do not seek to alter the existing compliance regime.  Rather, in expanding the category of persons who will be considered Investment Advice Fiduciaries, the Proposed Rules would make the existing penalty structure more broadly available as an enforcement tool.  This aspect of the Proposed Rules is significant not only for potential Investment Advice Fiduciaries but also for government authorities, plans, participants, and beneficiaries seeking recourse for breaches of fiduciary duty.

This client alert has discussed fiduciary duties under ERISA in the context of the Proposed Rules.  For more information about the Proposed Rules, fiduciary duties in general, or other issues concerning your employee benefit plans, please contact Joanne C. Youn at jyoun@capdale.com or at 202.862.7855.

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[1]  The Proposed Rules which were published on April 20, 2015 also apply when determining who is a fiduciary for purposes of the prohibited transaction rules applicable to IRAs under the Internal Revenue Code.  In this client alert, we restrict our discussion to the Proposed Rules in the context of ERISA.
[2]  As the Supreme Court's recent decision in Tibble v. Edison International makes clear, fiduciary duty with respect to plan investments is not a one-time act but extends to continuing oversight of a plan's investment portfolio.

 

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About Caplin & Drysdale
Having celebrated our 50th Anniversary in 2014, Caplin & Drysdale continues to be a leading provider of tax, tax controversy, and litigation legal services to corporations, individuals, and nonprofits throughout the United States and around the world. We are also privileged to serve as legal advisors to accounting firms, financial institutions, law firms, and other professional services organizations.

The firm's reputation over the years has earned us the trust and respect of clients, industry peers, and government agencies. Moreover, clients rely on our broad knowledge of the law and our keen insights into their business concerns and personal interests. Our lawyers' strong tactical and problem-solving skills - combined with substantial experience handling a variety of complex, high stakes, matters in a boutique environment - make us one the nation's most distinctive law firms.

With offices in New York City and Washington, D.C., Caplin & Drysdale's core practice areas include:

-Bankruptcy
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-Employee Benefits
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Washington, DC 20005
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Disclaimer
This communication does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome.

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It is possible that under the laws, rules, or regulations of certain jurisdictions, this may be construed as an advertisement or solicitation.

© 2015 Caplin & Drysdale, Chartered
All Rights Reserved.



 

________________________________________________

About Caplin & Drysdale
Having celebrated our 50th Anniversary in 2014, Caplin & Drysdale continues to be a leading provider of legal services to corporations, individuals, and nonprofits throughout the United States and around the world. We are also privileged to serve as legal advisors to accounting firms, financial institutions, law firms, and other professional services organizations.

The firm's reputation over the years has earned us the trust and respect of clients, industry peers, and government agencies. Moreover, clients rely on our broad knowledge of the law and our keen insights into their business concerns and personal interests. Our lawyers' strong tactical and problem-solving skills -- combined with substantial experience handling a variety of complex, high stakes, matters in a boutique environment -- make us one the nation's most distinctive law firms.

With offices in New York City and Washington, D.C., Caplin & Drysdale's core practice areas include:
For more information, please visit us at www.caplindrysdale.com.
Washington, DC Office:
One Thomas Circle NW
Suite 1100
Washington, DC 20005
202.862.5000
New York, NY Office:
600 Lexington Avenue
21st Floor
New York, NY 10022
212.379.6000

___________________________

Disclaimer
This communication does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome.

Attorney Advertising
It is possible that under the laws, rules, or regulations of certain jurisdictions, this may be construed as an advertisement or solicitation.
© 2019 Caplin & Drysdale, Chartered
All Rights Reserved.

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