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Am I acting as a fiduciary during the sales process? What might trigger fiduciary status?

BACKGROUND

Historically, ERISA fiduciary status is based on conduct: if you do the things that make you a fiduciary, you are a fiduciary whether you disclaim that status or not. You can be a fiduciary if you possess or exercise discretion over plan assets or plan administration. For example, if you, as the advisor, actually select the investments for the plan, you are a fiduciary because you exercised discretion. This is commonly known as being a 3(38) fiduciary investment manager. You could instead be a non-discretionary fiduciary investment advisor, paid to give fiduciary advice even though you may not exercise discretion. This is commonly known as a 3(21) fiduciary advisor.

The new DOL fiduciary rule defines when a non-discretionary advisor becomes a fiduciary, and this new, expanded definition applies to both ERISA plans and Covered Individual Accounts (e.g. IRAs). Under the new rule, you are a fiduciary investment advisor if you check off three boxes. First, who am I talking to? Am I talking to a plan, plan fiduciary, plan participant, or Covered Individual Account (i.e. IRA) owner?

Who Am I Talking To?

Advice may be fiduciary investment advice if it is provided to:

  • IRAs (and other entities under IRC § 4975); or
  • ERISA plans, or plan participants/beneficiaries

Second, what are we talking about? Fiduciary advice can include a buy sell hold recommendation; a recommendation regarding a distribution or regarding whether or where to roll over assets to or from a plan or IRA; a recommendation of another fiduciary; or a recommendation about the type of account, such as a transaction-based or fee-based account.

What Am I Talking About?

Advice may be fiduciary investment advice if it concerns:

  • Recommendations as to acquiring, holding, disposing of or exchanging investments;
  • Recommendation of distributions or rollovers to participants and IRA owners (including whether, in what amount, in what form, or where to);
  • Recommendations of fiduciary advisors; or
  • Recommendations of type of investment account (e.g. brokerage vs. fee-based)

Third, how did this conversation start? Under the new rule, an advisor can begin a fiduciary conversation without any agreement or acknowledgment from the advice recipient. If the advisor directs to a specific person a recommendation about a particular investment, then it is fiduciary advice, just as if the advisor and client agreed to give fiduciary advice via a services agreement. Thus, saying to an ERISA plan participant, “You should do a rollover” is the start of a fiduciary conversation if the advisor is ultimately paid in connection with that advice.

How Did the Conversation Start?

  • The advisor acknowledges fiduciary status;
  • mutual agreement; or
  • Advisor gives the advice to a specific recipient regarding the advisability of a particular investment or management decision.

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