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What's unique about an advisor being an ERISA fiduciary?

There are two primary consequences of an advisor being an ERISA fiduciary: abiding by the ERISA fiduciary standard of care, and being subject to the prohibited transaction rules in ERISA and the Internal Revenue Code.

The ERISA fiduciary standard imposes specific duties. It requires an ERISA fiduciary to act solely in the interest of the participants and beneficiaries of the employee benefit plan. He or she has a duty to use plan assets only to pay benefits or to defray the reasonable and necessary expenses of the plan. There is a duty to follow the law and the plan documents (in that order), and to diversify plan investments.

The core of ERISA fiduciary duty, though, is to act prudently in making plan decisions. As in other fiduciary situations, prudence is defined by process and by the inputs to the decision, not by whether the decision proves to be right or wrong in hindsight. In many ways, this is an “i” dotting and “t” crossing standard that has the fiduciary considering all the relevant factors and making a decision that a similarly situated fiduciary confronting the same issue at the same moment could have made.

The prudent process takes into account all the relevant factors to the decision, evaluates them and reaches a decision based on the totality of those factors and what is in the best interest of the plan or participant. The fiduciary must gather the information necessary to take into account all relevant factors. All this should be documented at the time it happens to demonstrate the prudent process.

The other unique feature about being an ERISA fiduciary is complying with the significant restrictions of the prohibited transaction rules in ERISA and the Internal Revenue Code.  The fiduciary is prohibited from using its position to benefit itself. This self-dealing is defined broadly, and is not limited to obvious problems like taking bribes or stealing money. For example, receiving a fee for recommending investment A that is different from the fee for investment B is prohibited because it allows the fiduciary to influence his or her own compensation. This applies not just to the advisor, but to its affiliates as well, prohibiting, for example, recommendations to use proprietary funds. Commissions generally are prohibited also because they are payments from a third party received in connection with the plan. Special rules, called exemptions, may permit some of these activities despite the general prohibition, but only subject to additional conditions.  For example, the Best Interest Contract Exemption (BIC Exemption) is a special rule that would allow a fiduciary to receive a commission and to advise on proprietary products, but only after complying with all of its conditions.

In other words, an advisor who previously was not an ERISA fiduciary, but who now becomes one under the new fiduciary rule (or who must abide by the very similar Best Interest fiduciary standard as a condition of an exemption) likely faces two significant changes. The fiduciary standard governs how you make and document a fiduciary advice recommendation, and the prohibited transaction rules govern how you get paid.

G46288-20