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Dodd-Frank Prompts Change To ERISA Definition Of 'Fiduciary'

Post–economic crisis, Washington wants transparency and accountability for pension plans governed by the Employee Retirement Income Security Act.

Post–economic crisis, Washington wants transparency and accountability for pension plans governed by the Employee Retirement Income Security Act. To comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Department of Labor is expanding the definition of “fiduciary” in the 1974 ERISA law, which predates 401(k) plans.

One of the main goals is to avoid conflicts of interest by prohibiting those who execute investments from advising clients on where to invest. But in seeking to redefine who qualifies as a fiduciary — someone sworn to act on another’s behalf — regulators may have cast their net too wide.

The DoL’s October 2010 proposal covers almost the entire investment and administrative chain, critics charge. If advisers can’t profit from the advice they give, who will be left to tell people where to put their money? It’s a conundrum for pension plan service providers, which have been entrusted with  $10.3 trillion in assets.

“This is the most seismic event related to ERISA since the initial definition was proposed,” says Steven Rabitz, a partner with Stroock & Stroock & Lavan, a New York–based law firm representing pension plans, asset managers and large broker-dealers. Rabitz warns that the change could result in higher costs, wider spreads and reduced investment options that would hurt pension plans and their service providers.

Opponents of the proposed rule say providers will need to adopt sophisticated oversight and reporting technology and reveal what their clients pay for investments, research and advice. The fear is that after weighing such costs, both sides may drop products and services.

Others welcome the change. “The DoL simplifies things,” asserts investment management consultant Stephen Winks, founder of the Richmond, Virginia–based Society of   Senior Consultants. “Anyone who provides personalized or individualized advice — just about everyone — and charges a fee is a fiduciary,” he adds.

“The jig is up” for financial advisers who have been hiding behind an ERISA exclusion that lets them avoid fiduciary responsibility, says Ronald Surz, president and CEO of San Clemente, California–based pension consulting firm PPCA.

Concerned parties, including broker-dealers, asset managers, investment consultants and plan sponsors, await the final DoL ruling. Supporters and detractors hope there will be a revision that incorporates their suggestions before the January 2012 deadline.

To that end, the department has received more than 200 comment letters. Many of them laud its efforts, but one of the direst warnings came from T. Timothy Ryan Jr., president and CEO of the New York– and Washington-based Securities Industry and Financial Markets Association. “The ability of millions of Americans to save for retirement will be adversely impacted,” Ryan wrote.

Julia Bonafede, president of Wilshire Consulting, a division of Santa Monica, California–based investment manager Wilshire Associates whose clients include pension funds, says a broader definition of fiduciary won’t affect how her firm delivers services to defined contribution plans. “There may be increases to the costs of running a plan as service providers upgrade to meet these higher standards or drop services altogether, thereby potentially eroding price competition,” Bonafede concedes.

As the fiduciary debate simmers, the DoL is standing its ground. Phyllis Borzi, assistant secretary of Labor at the department’s Employee Benefits Security Administration, notes that there’s often a knowledge gap between investment professionals and plan fiduciaries and participants. “The current rule is based on arbitrary distinctions that bear little or no relationship to the significance of the advice and makes it easy for investment professionals to avoid being a fiduciary, leaving other fiduciaries with limited investment knowledge on the hook for that advice,” Borzi says.

Consultant Winks believes the push-back from brokerages could cripple their ability to act in clients’ best interests. “The brokerage industry is in denial,” he says.

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