DOL Reinstates Traditional Test for ERISA Fiduciary Status:

ERISA and the Internal Revenue Code prohibit fiduciaries who provide investment advice to plan participants and IRAs from receiving compensation that varies based on their investment advice and compensation that is paid to the fiduciaries by third parties. During the last few Presidential administrations, the Republican and Democratic parties have taken turns overturning the other party’s rule regarding who constitutes a fiduciary under ERISA by virtue of giving investment advice to plan participants for a fee or other compensation. In that exchange’s latest salvo, on March 18 the Trump administration overturned the Biden-era rule.

The Biden-era rule replaced regulations dating back to 1975, which established a so-called five-part test for determining fiduciary status under section 3(21)(A)(ii) of ERISA (which addresses people who provide investment advice to plan participants). In a March 18 News Release, the DOL stated “The challenged regulation wrongly sought to impose ERISA fiduciary status on securities brokers and insurance agents when there was not a relationship of trust and confidence. The Securities and Exchange Commission and state regulators regulate the activities of securities brokers and insurance agents and will continue to do so.”

Also on March 18, the DOL republished “in full” the guidance originally published on December 18, 2020. Under that guidance, a person is deemed to render ‘‘investment advice’’ to an ERISA  plan only if he or she renders advice to the plan regarding the value of securities or other property or makes recommendation regarding the advisability of investing in, purchasing, or selling securities or other property, and he or she directly or indirectly (e.g., together with an affiliate):

• Has discretionary authority or control, whether or not pursuant to agreement, arrangement or understanding, with respect to purchasing or selling securities or other property for the plan; or
• Renders investment advice for a fee or other compensation on a regular basis to the plan pursuant to a mutual agreement, between such person and the plan or a fiduciary with respect to the plan, that such services will serve as a primary basis for investment decisions for plan assets, and that such person will render individualized investment advice to the plan based on the particular needs of the plan regarding such matters as investment policies or strategy, overall portfolio composition, or diversifying plan investments.

If those requirements are satisfied, the investment provider is a fiduciary under ERISA to the extent of the advice given and must therefore satisfy ERISA’s fiduciary duties (e.g., prudence, loyalty, etc.)