At the Pension Rights Center, we deal with a lot of technical language that can be puzzling to people who don’t work on retirement income issues. But the meaning of words is important, even if you don’t use them every day, and, when it comes to the law, a word’s meaning can make all the difference.
Take for example the word “fiduciary.” When applied to a retirement plan, a “fiduciary” is a person who has authority over plan assets or someone who gives investment advice for a fee to the plan and its participants. Fiduciaries are legally required to act solely in the interests of plan participants rather than in their own interests or the interests of their employers.
The Department of Labor’s current definition of “fiduciary” was written in 1975, before the creation of 401(k) plans, and before the existence of the many investment advisors who today give advice to 401(k) plans and their participants.
In light of this new landscape, the Department of Labor has proposed a regulation that expands the definition of “fiduciary” to include more investment advisors and more types of investment advice. In addition, the proposed rule clarifies that investment advisors to individual participants will be fiduciaries.
In comments to the Department of Labor, the Pension Rights Center expressed its strong support for the proposed regulation. It will greatly expand the circumstances under which investment advisors will be required to act only in the interests of 401(k) plans and their participants. The National Employment Lawyers Association joined with the Center in filing the comments.
In its proposal, the Labor Department asked if a person who advises individual 401(k) participants about whether to keep their money in a plan or take a plan distribution should be treated as a fiduciary. Advice to participants who are deciding whether to take their money out of a plan and invest it elsewhere should be considered “investment advice.” We think advisors in this situation should be fiduciaries with the obligation to consider only the interests of the participants.
The Center expressed a few concerns about the proposed regulation. Most important, the proposal says that an investment advisor will not be considered a fiduciary if the person receiving the advice knows or should know that the advice is not impartial. This exception might be appropriate if the person receiving the advice is a professional plan administrator, who is expected to have a certain level of expertise, but this exception should not apply to individual participants in a plan.
The Department of Labor will hold a hearing on the proposed regulations on March 1, and senior policy consultant Norman Stein will testify on behalf of the Pension Rights Center. Read the Center’s comments on this proposed regulation.