The Department of Labor (DOL) is proposing a rule change that would classify the brokers of retirement plans as fiduciaries. If approved, retirement brokers would be subject to the Employee Retirement Investment Security Act of 1974 (ERISA), including the requirement that they act in the best interest of their client. Analysis from the White House put pressure on the DOL to reevaluate the classification of investment brokers. In a controversial report released in February 2015, the White House Council of Economic Advisers estimated $17 billion of investor funds are lost annually because of conflicted investment advice. The changes are designed to create additional safe guards for investors who use investment advisers to direct their 401(k) or Individual Retirement Account (IRA) plans.

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Background
ERISA charges fiduciaries with responsibilities to the
plan participants and beneficiaries. They mustdiversify
plan investments, pay reasonable plan expenses
and carry out duties prudently. Additionally, they are
prohibited from engaging in certain transactions that
would harm the plan. If fiduciaries do not follow the
necessary conduct, ERISA holds them liable for plan
losses.
ERISA classifies fiduciaries as anyone who gives
investment advice about plan assets or has the
authority to do so, for a fee. A five-part test provides
more specificity about what this means:
1. The adviser must make recommendations for
investing that include the purchasing, or selling of
securities or advise on the value of securities.
2. Investment advice must be provided on an
ongoing, regular basis.
3. The advice is given on the condition that the
investment broker and the investor mutually
understand it.
4. The broker’s advice is the primary basis for the
investor’s investment decisions.
5. The advice is tailored to address the individual
plan.
The Department of Labor (DOL) is proposing a rule
change that would classify the brokers of retirement
plans as fiduciaries. If approved, retirement brokers
would be subject to the Employee Retirement
Investment Security Act of 1974 (ERISA), including
the requirement that they act in the best interest of
their client.
Analysis from the White House put pressure on the
DOL to reevaluate the classification of investment
brokers. In a controversial report released in February
2015, the White House Council of Economic Advisers
estimated $17 billion of investor funds are lost annually
because of conflicted investment advice. The changes
are designed to create additional safe guards for
investors who use investment advisers to direct their
401(k) or Individual Retirement Account (IRA) plans.
This is not the first time the DOL proposed a revamp of
the fiduciary definition. It suggested a similar measure
in 2010, but withdrew it after receiving criticism
from the investment industry. A similar pushback
is expected for this revision as well; the Securities
Industry and Financial Markets Association has called
into question the validity of the financial data analysis
in the oft-quoted February 2015 report.
April 2015
Department of Labor Proposes New Definition for Fiduciaries

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
Investment brokers often fail to meet the five-part
test, which scopes them out of the current fiduciary
definition. The DOL raised concerns that without the
restrictions placed by the fiduciary role, investment
brokers could operate in their own financial interest,
not the interests of the plan, when providing advice
about plan investments. They would also not be liable
for any harm that fell to the plan based upon their
recommendations.
Overview of Proposed Changes
The DOL proposes that investment advisers receiving
compensation for their services should be considered
fiduciaries if:
1. They provide investment advice, recommendations
or appraisals to a plan fiduciary, participant or
beneficiary, and
2. They acknowledge either that they are providing
advice tailored to help with plan investment decision-
making or the fiduciary nature of the advice.
The proposal specifically excludes general investment
education from investment advice in the fiduciary
consideration. Sales pitches to financial experts,
appraisal and valuations of stock held by employee-
stock ownership plans are also carved out of this
consideration.
Certain elements of the fiduciary status may present
problems for the investment advisers’ business
models. For example, revenue sharing or commission
based on plan performance, both common in the
industry, may be considered prohibited transactions
under ERISA. The new fiduciary definition would
create an exemption for investment advisers who
agree to certain terms. Under the best interest
contract exemption, if advisers agree to comply with
their responsibilities as a fiduciary, the compensation
practices listed above will not be considered prohibited
transactions.
What Comes Next
Once published in the Federal Register, the proposed
changes will have 75-day public comment period.
The DOL will consider the feedback and if any
modifications to the proposal need to be made before
publishing the final standard.
For More Information
If you have any specific questions, comments or
concerns about how the proposed change to the
definition of fiduciary could affect your organization,
please contact Hal Hunt, MHM’s National Employee
Benefit Plan Practice Leader, or your MHM service
professional. You can reach Hal at hhunt@cbiz.com
or 913.234.1012.