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DOL/EBSA RIN: 1210-AC02 Publication ID: Fall 2022 
Title: Definition of the Term "Fiduciary" 
Abstract:

This rulemaking would amend the regulatory definition of the term fiduciary set forth at 29 CFR 2510.3-21(c) to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of section 3(21) of ERISA and section 4975(e)(3) of the Internal Revenue Code.  The amendment would take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest.  In conjunction with this rulemaking, EBSA also will evaluate available prohibited transaction class exemptions and propose amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors.

 
Agency: Department of Labor(DOL)  Priority: Economically Significant 
RIN Status: Previously published in the Unified Agenda Agenda Stage of Rulemaking: Proposed Rule Stage 
Major: Yes  Unfunded Mandates: Undetermined 
CFR Citation: 29 CFR 2510.3-21   
Legal Authority: 29 U.S.C. 1002    29 U.S.C. 1135    Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 252 (2020)   
Legal Deadline:  None

Statement of Need:

Many protections, duties, and liabilities in ERISA hinge on fiduciary status; therefore, the determination of who is a fiduciary is of central importance.  The Department’s existing regulatory definition of an investment advice fiduciary, adopted in 1975, established a five-part test for status as a fiduciary.  The 1975 regulation’s five-part test is not founded in the statutory text of ERISA, does not take into account the current nature and structure of many individual account retirement plans and IRAs, is inconsistent with the reasonable expectations of plan officials and participants, and IRA owners who receive investment advice, and allows many investment advice providers to avoid status as a fiduciary under federal pension laws.  Under ERISA, fiduciaries must avoid conflicts of interest or comply with a prohibited transaction exemption with conditions designed to protect retirement investors.  A wide and compelling body of evidence shows that conflicts of interest and forms of compensation that can subject advisers to harmful conflicts of interest, if left unchecked, too often result in biased investment advice and resulting harm to retirement investors.  In conjunction with this rulemaking, EBSA also will evaluate available prohibited transaction class exemptions and consider proposing amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors.

Summary of the Legal Basis:

The Department is proposing the amendment to its regulation defining a fiduciary pursuant to authority in ERISA section 505 (29 U.S.C. 1135) and section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 252 (2020).

Alternatives:

The Department considered as an alternative leaving the 1975 regulation in place without change. 

 

Anticipated Costs and Benefits:

The proposed amendment to the 1975 regulation would extend the protections associated with fiduciary status to more advice arrangements.  The proposed regulation and associated prohibited transaction exemptions are expected to require providers of investment advice to adhere to a best interest standard, charge no more than reasonable compensation, eliminate or mitigate conflicts of interest, and make important disclosures to their customers, among other things.  These protections would deliver substantial gains for retirement investors and economic benefits that more than justify the costs. The costs of the regulation are largely expected to stem from compliance with the associated prohibited transaction exemptions.  Estimates of the cost of compliance are still under development and will be reflected in the notice of proposed rulemaking.

Risks:

The Department believes that the 1975 regulation must be revised to align with retirement investors’ reasonable expectations regarding their relationships with investment advice providers and to reflect developments in the investment advice marketplace since the 1975 regulation was adopted.  Failure to appropriately define an investment advice fiduciary under ERISA is likely to expose retirement investors to conflicts of interest that will erode retirement savings.  The risks are especially great with respect to recommendations to roll assets out of ERISA-covered plans to IRAs because of the central importance of retirement plan savings to workers, the relative size of rollover transactions, and the technical requirements of the current fiduciary regulation, which have encouraged advisers to argue that their advice falls outside the regulation’s purview regardless of its importance. 

Timetable:
Action Date FR Cite
NPRM  12/00/2022 
Regulatory Flexibility Analysis Required: Undetermined  Government Levels Affected: Undetermined 
Federalism: Undetermined 
Included in the Regulatory Plan: Yes 
RIN Data Printed in the FR: No 
Agency Contact:
Karen E. Lloyd
Office of Regulations and Interpretations
Department of Labor
Employee Benefits Security Administration
200 Constitution Avenue NW, FP Building, Room N-5655,
Washington, DC 20210
Phone:202 693-8510