Interval Funds

Oct 09. 15:31

White Paper Summary: The Final Rule: DOL’s Expanded Definition of Investment Advice Fiduciary Under ERISA and Revised Complex of Exemptions

Expanded Definition of "Fiduciary" Under ERISA

On Labor Day 1974, after a decades' worth of scandals related to pension fund mismanagement in the U.S., President Gerald Ford signed the Employee Retirement Income Security Act (ERISA) into law. ERISA established minimum standards for private corporations' voluntary retirement and healthcare plans, in order to protect plan participants from the nightmare scenario of spending decades paying into a retirement plan that barely - or never - materializes.

In 2016 the U.S. Department of Labor (DOL) issued its consequential "Final Rule," expanding the definition of a "fiduciary" of an employee benefit plan under ERISA. Shortly thereafter, Atlanta-based corporate law firm Eversheds Sutherland released a comprehensive white paper analyzing the implications of the expanded definition, highlighting critical issues, and clarifying new exemptions.

The Final Rule: DOL’s Expanded Definition of Investment Advice Fiduciary Under ERISA and Revised Complex of Exemptions

Who Qualifies?

Under ERISA § 3(21) (A) (ii) : “… [A] person is a fiduciary with respect to a plan to the extent … he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan…” (Sutherland, p.ii).

DOL clarified the rule to include anyone providing any of the following services: making recommendations regarding investment in a plan/IRA; investments after rolling over or transferring from a plan/IRA; or management of investment in a plan/IRA. Furthermore, that person must also hold any of the following statuses: be an admitted fiduciary; provide advice pursuant to any arrangement that the advice is designed to help the recipient; or "direct advice ... regarding a particular management or investment decision."

If a person meets the above criteria for services and status, and receives a direct or indirect fee for their work, then they are a "fiduciary" under the new ERISA rule. Relative to previous rules, the definition specifically calls out advice agreed to serve the interests of the recipient.

By the beginning of 2018, the new ERISA rule began impacting nearly $19 T worth of assets under management, including plans and IRAs already subject to ERISA, as well as traditional IRAs, Roth IRAs, Archer medical savings accounts, health savings accounts, and Coverdell education savings accounts (Sutherland, p.i, 2).

Who's Exempt?

As expected, DOL carved out numerous exemptions to the new rule. 

For example, regarding plan sponsors, model asset allocations and interactive tools (i.e. tools to analyze hypothetical investment scenarios) would not be considered "recommendations," and intracompany communication about plan options - including term life, health, and disability plans - would not be considered "fiduciary investment advice" (Sutherland, p.1). 

Furthermore, a service provider marketing their own services would not make them a "fiduciary" so long as the marketing omitted any specific investment recommendations. This includes the promotion of investment platforms, general marketing communications, and even general investment education, so long as the service provider was not an admitted fiduciary (Sutherland, p.7).

Importantly, the Final Rule also represented a major restructuring of Prohibited Transaction Exemptions (PTEs), otherwise known as transactions that ERISA allows. The new proposal is called the Best Interest Contract Exemption (BICE) and provides guidelines on the the ways fiduciaries are allowed to get paid. The BICE defines permitted types of compensation, qualifying types of advisers and financial institutions, the "Retirement Investor" profile, broad exemptions to the exemptions (for example, BICE does not apply to "robo-advice"), contract requirements and terms, transaction and webpage disclosures, disclosures to DOL, standards for recordkeeping, qualifying products and payments, conditions for "Level Fee Fiduciaries," exemptions for the purchase of certain investment products, and various grandfather clauses (Sutherland, p. 9-17).

Sutherland also analyzed how the rule differs in the context of previous PTE definitions, including cases where relief for the purchase of different types of securities has been revoked, and a litany of miscellaneous callouts pertaining to allocation, use of proceeds, underwriting, market-making, mortgage pool investment trusts, and more (Sutherland, p.20, 22-23).

Regardless of the exemptions, the Final Rule forced many fiduciaries - including a host of newly-defined fiduciaries - to significantly re-work the way their firms earned revenue.

Impact & Criticism

Most critics of the Final Rule, at least ostensibly, voiced their support for the rule's objective - that fiduciaries should take some level of responsibility for balancing the interests of their clients against the revenue requirements of their practice. Their issue was with the execution of the rule, and the impact it would have on investors and the broader retirement industry. While the DOL make some concessions in response to the backlash, critics still objected that the DOL lacked both the jurisdictional authority and the finance competence to demand such sweeping changes. Beyond procedural questions, critics also lambasted the DOL's cost-benefit analysis, concerned that a haphazard execution would drive up operating costs that would ultimately fall on the investors the Final Rule was intended to protect. After all, the broader goal - and urgent need - is to get more American workers onto retirement plans, not make them more expensive (Sutherland, p.3, 6).

Negative feedback notwithstanding, the Final Rule went into effect in April 2017, with the complex of exemptions and all PTE conditions going live the following January. Retirement product/service providers adjacent to qualifying plans were forced to respond in a few key ways. Firstly, avoid fiduciary status if possible, although the Final Rule makes this much more difficult. Secondly, go on the offensive against conflicted interests, either by passing extra revenue to qualifying plans themselves, or by outsourcing advice that creates varying revenue to an independent third party. Finally, barring those strategies, simply adapt, and rebuild a revenue strategy around BICE and other exemptions (Sutherland, p.2, 24).

Of course, there's always court. Before the rule even went into effect, the U.S. Chamber of Commerce and 8 other commerce- and retirement-related groups sued the DOL in the U.S. District Court for the Northern District of Texas, arguing that the DOL had overstepped its authority, that the Final Rule created hurdles that undermined retiree interests, and ultimately, that it was illegal. The core legal question was whether the Final Rule worked for all retirement savers.

The district court ruled in favor of the plaintiffs, and the DOL filed an appeal with the 5th Circuit Court of appeals. By this time 13 other groups had joined two additional lawsuits against the DOL. In June 2018 the court issued a judgement upholding the previous ruling, the Final Rule was vacated in entirety, and the DOL was ordered to pay the appellees' court costs.


The saga of the DOL's final rule - as well as the events following the publishing of Sutherland's white paper - hold several valuable lessons for stakeholders.

Regulators, obviously, would do well to remember that good intentions are not a substitute for proper legal diligence when issuing rules that could adversely impact large chunks of entire industries. Protecting retirees is a noble pursuit, but the whole exercise becomes a futile waste of time when executed improperly.

Fiduciaries and other providers of financial products and services should continue to stay abreast of changing regulations.

Finally, investors, particularly small investors, should be aware that fiduciaries are no longer required to act in clients' best interests when managing retirement accounts. It doesn't guarantee an adversarial relationship between fiduciary and client, but the onus is on future retirees to take responsibility for their own diligence when evaluating paying fees for retirement advice.

We built to make that diligence easier for investors evaluating closed-end interval funds. Visit our Funds page to compare metrics like performance and fee structures, and arm yourself with knowledge that will help you make better-informed investment decisions.

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