ERISA and Retirement Plan Fiduciaries

Contents

1. Who the law makes a fiduciary
2. The duties
3. The five part test
4. The 2016 rule and after
5. What remains unsettled

Brent O’Mara holds the Certified Fund Specialist and Accredited Investment Fiduciary designations, and the duty named in the second of them has a separate statutory home for workplace retirement plans. That home dates from a collapse. In 1963 an automaker closed its South Bend plant and its pension plan could not pay what workers had been promised, an episode a law school’s online reference calls the most infamous of several ill managed funds in which thousands lost their retirement benefits.² Eleven years later Congress answered with the Employee Retirement Income Security Act of 1974, known by its initials, which set new standards for the transparency and management of private retirement plans, required employers to fund them, created a federal corporation to insure certain pension payments, and bound the managers of pensions with new fiduciary duties.²

Who the law makes a fiduciary

The act does not ask whether a person calls himself a fiduciary. It looks at what the person does. The Department of Labor’s summary says that anyone who exercises discretionary control or authority over a plan’s management or assets, anyone with discretionary authority over its administration, and anyone who provides investment advice to a plan for compensation is subject to fiduciary responsibilities, and the department gives plan trustees, plan administrators and members of a plan’s investment committee as examples.¹ The third category, advice for compensation, is the one that has caused most of the argument since, because it decides whether an outside professional advising a plan or a participant is held to the act’s standard.

The duties

The duties themselves are stated with unusual directness. A fiduciary’s primary responsibility is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses; fiduciaries must act prudently, must diversify the plan’s investments to minimize the risk of large losses, must follow the plan documents so far as those are consistent with the act, and must avoid conflicts of interest, meaning transactions that benefit other fiduciaries, service providers or the sponsoring employer.¹ A fiduciary who falls short may be personally liable to restore losses to the plan or to give up profits made through improper use of its assets, and a court may remove one who neglects them.¹ Readers who know trust law will recognize the shape; the entry on loyalty as trustees owe it describes the older model, and the entry on the Investment Advisers Act the parallel federal duty for advisers.

Figure

The duties the law places on a plan fiduciary

1. 01
   LoyaltyRun the plan solely in the interest of participants and beneficiaries, for the exclusive purpose of providing benefits and paying plan expenses.
2. 02
   PrudenceAct prudently in managing the plan and its investments.
3. 03
   DiversificationDiversify the plan's investments to minimize the risk of large losses.
4. 04
   Plan termsFollow the plan documents so far as they are consistent with the law.
5. 05
   ConflictsAvoid transactions that benefit parties related to the plan, such as other fiduciaries, service providers or the plan sponsor.

The five part test

For four decades the question of who gave fiduciary advice turned on a regulation written in 1975. A newspaper account of September 2011 explained that under that regulation a person was deemed a fiduciary only if he or she met a five part test, one part of which required that advice be given on a regular basis, so that an employer hiring an adviser for one time advice on a 401(k) plan was dealing with someone who did not have to act as a fiduciary.⁵ The official then in charge of the relevant Labor agency testified that the narrowness of the regulation had opened the door to serious problems, and that 401(k) plans did not yet exist and individual retirement accounts had only just been authorized when it was written.⁵ A public television guide added a second element: unless there was an understanding that the advice would serve as the primary basis for an investment decision, the adviser was not a fiduciary, which allowed brokers to avoid the obligation through disclaimers.⁶

The effort to rewrite the test began in the fall of 2010, when the department unveiled a proposal to broaden the definition, and it was pulled back in September 2011 after criticism from industry groups, lawmakers and some consumer advocates; more than 300 public comments had been filed.⁶ In January 2011 the Government Accountability Office had recommended that the Secretary of Labor amend and finalize the proposed regulations changing the definition of a fiduciary for purposes of investment advice, and its report later recorded the recommendation as implemented by the April 2015 reproposal.⁴ The office had been asked to describe where service providers might face conflicts when helping employers and workers choose plan investments, and it also urged the department to revisit a bulletin that allowed providers to feature their own products in educational materials.⁴ Industry objections to the 2010 draft, voiced by a securities trade group, included fears that brokerages could no longer charge commissions on IRA investments or sell customers securities from their own inventory.⁵ In February 2015 the president announced at a seniors’ organization that he would use executive authority to hold more advisers to stricter standards, describing what he called backdoor fees paid to advisers for steering savers toward particular funds.⁸ A British weekly noted that the April 2015 proposal would give the department a role over the $8 trillion in individual retirement accounts in addition to the $5 trillion in company plans it already supervised.⁹

Figure

The money at stake in 2015

held in individual retirement accounts, which the proposal would bring under the department's oversight of advice

$8 trillion

held in company sponsored 401(k) plans, already under its supervision

$5 trillion

The 2016 rule and after

The final rule arrived on April 6, 2016. A retirement research center at Boston College described its mechanism: because anyone giving investment advice within a plan must already act as a fiduciary under the act, the rule expanded coverage by redefining the term investment advice, replacing the 1975 five part test with a four part test, extending the duty to rollovers and to IRA assets, and adding a best interest contract exemption so that commission based arrangements could continue under a signed promise to put the saver first.⁷ The center listed six carve outs, among them platform providers and investment education.⁷ The rule’s life was short. After a sixty day delay from an original April 10 date, the Labor Secretary set June 9, 2017 as its implementation date while seeking public comment on revising it, and a business magazine reported that the administration had ordered a wider look at the regulation.¹⁰ The department later issued a successor, the Retirement Security Rule, whose page describes fiduciary advice providers as required to give prudent and loyal advice, avoid misleading statements about conflicts and fees, charge no more than is reasonable, and manage their conflicts; the same page carries a notice that the rule and its related exemptions were vacated by court order in two Texas cases, with a notice published on March 20, 2026.³

Figure

Fifteen years of rulemaking

1. 01
   Fall 2010A proposal to broaden who counts as a fiduciary is unveiled, then withdrawn in September 2011 after heavy criticism.
2. 02
   January 2011The Government Accountability Office recommends that Labor amend the definition of a fiduciary for investment advice.
3. 03
   February 2015The White House announces a renewed conflict of interest rule.
4. 04
   April 20, 2015The department reproposes the rule.
5. 05
   April 6, 2016The final rule is released, replacing the five part test with a four part test and adding a best interest contract exemption.
6. 06
   June 9, 2017The implementation date, set after a sixty day delay.
7. 07
   March 2026A later rule, the Retirement Security Rule, is noted as vacated by court order.

What remains unsettled

The core of the act is stable. Who runs a plan, and the duties of loyalty, prudence and diversification they owe, have not changed since 1974 in any way the sources describe.¹ What remains unsettled is the edge: whether a professional who advises a participant once, or who recommends moving money out of a plan, is giving fiduciary advice in the act’s sense. The 2010 proposal was withdrawn, the 2016 rule was vacated, and the 2024 successor was vacated in turn, which leaves the 1975 regulation’s approach as the one that has survived every attempt to replace it.³ The SEC’s rule for brokers, described under Regulation Best Interest and Form CRS, now covers some of the same ground from a different statute. For a particular saver, how a plan, a rollover or a beneficiary designation should be handled turns on each person’s own circumstances, and the tax and estate consequences are for qualified professionals to work through, not a summary of the law.