I have blogged many times on the DOL’s progressive or aggressive (the adjective you choose depends on your view of the changes) program to alter the fiduciary landscape of defined contribution plans, by – in general – increasing the flow of information among providers, participants and plan sponsors on the one hand, and on the other hand decreasing loopholes that allow some providers to avoid fiduciary status. This story here gets right at the heart of one proposed regulatory change that would make it easier for providers who offer financial advice and products to be transformed into fiduciaries, by focusing on the key element of the regulatory change that has the effect; as the author explains:
ERISA regulations [currently] allow many investment service providers to escape fiduciary accountability for the advice that they provide to retirement plan sponsors and participants. The problem is that the Employee Retirement Income Security Act of 1974’s definition of “fiduciary” is too narrow and nuanced. In particular, only advice that is both regular and serves as the primary source of decision making gives rise to fiduciary standing. Last October, the Labor Department proposed changing the definition by dropping the “regular” and “primary” requirements so that even one-time or periodic advice that is considered part of the decision-making process by the recipients would make the provider a fiduciary.
I like to think of this change as you make the advice, you own it. As a lawyer, that’s the rule I live by, and frankly I have no choice in the matter, from both the perspective of legal malpractice standards and the profession’s rule of ethics. For me, the fact that outlier lawyers who don’t live up to this will, in my experience, eventually find themselves in trouble, either with judges on their cases, malpractice carriers, or the state bar, means that abiding by this golden rule does not disadvantage me either in the courtroom or in the marketplace for legal services, because it creates what is in general a level playing field: most lawyers abide by this principle, and the ones who don’t will eventually be pushed out of the equation.
To me, for the quality providers of investment advice, this proposed change would do little more than have the same effect. If they are already doing a good job, they should not face any greater barrier to their work simply by this codification of a standard that they are already living up to: if they are doing prudent and informed work already, they have nothing – on a day in day out basis – to fear from being rendered a fiduciary by this change. It is the competitors who are skating by and competing with them by providing a lower quality product who will be at risk, and who will either have to raise their game to the level of the better providers or face the legal exposure that comes from doing shoddy work while operating under the title of fiduciary.