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THE FIDUCIARY CORNER: Individual Financial Planners May Be ERISA Fiduciaries

An Advisory Opinion recently issued by the Department of Labor may come as quite a shock to many personal financial planners and investment advisors. According to the DOL, ERISA’s prudence, exclusive benefit, and prohibited transaction rules apply to many of the bread-and-butter recommendations that these professionals give, if their advice relates to assets held in qualified individual account plans.

The DOL guidance was issued in December (Advisory Opinion 2005-23A) in response to a series of questions raised by Deseret Mutual Benefit Administrators. Those questions asked whether, and how, ERISA’s fiduciary rules apply to financial planners or advisors. The DOL first opined that investment professionals who give individual investment advice to participants in defined contribution, individual account plans (such as 401(k) and profit sharing arrangements) in exchange for a fee could be “fiduciaries” of the plans, within the meaning of ERISA. This would be true even though the advisors are engaged by the individual participants, rather than the plans or other fiduciaries. It is most clearly the case if the advisors have discretionary authority to manage the participants’ plan investments. It is also true, however, for advisors who do not have discretionary authority over the accounts, if they give regular individualized investment advice to a participant with the expectation that the participant will act on it. This is because ERISA defines a “fiduciary” to include someone who provides investment advice for a fee.

Fiduciary status imports to individual financial advisors a number of constraints, as well as potential liability. For instance, such advisors may face fiduciary liability under ERISA for making imprudent investment recommendations. Such liability might exceed the advisors’ expectations, because ERISA likely would preempt any contractual or state-law limits on the advisors’ exposure.

Perhaps more importantly, as ERISA fiduciaries, financial planners and advisors will be subject to ERISA’s prohibited transaction rules. According to the Advisory Opinion, individual financial professionals would have to be extremely careful when advising participants in order to avoid violating ERISA’s self-dealing rules. If, for example, an advisor counsels a participant to take a distribution from the plan and then to invest the proceeds in an IRA managed by the advisor, the advisor may be “using plan assets in his or her own interest, in violation of ERISA section 406(b)(1).” Thus, relatively garden-variety investment recommendations could result in prohibited transactions.

The DOL was quick to note that merely advising a plan participant to take an otherwise permissible plan distribution does not, in and of itself, make a financial advisor an ERISA fiduciary. It is a rare occurrence, however, when such distribution advice is the first and only time the financial professional will have advised the participant. More frequently, the advisor will have had a long-standing advisory relationship with the participant, perhaps making the advisor an ERISA fiduciary. In those cases, when the advisor is already a fiduciary, the distribution and rollover advice will be subject to regulation by ERISA.

The Advisory Opinion assures plan sponsors and more “traditional” fiduciaries that they will generally not be liable for either the participant’s selection of an investment advisor or the advisor’s recommendations. Thus, the impact of this Opinion will most likely be seen primarily in the relationships between individual participants and their financial advisors.