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September 21, 2020

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September 18, 2020

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ERISA Fiduciary Rules: Court Challenges and Considerations for Employers

Employers and their financial advisors should consider enacting a multi-step plan amid anticipation that the proposed ERISA Fiduciary Rules turn effective.

Last month, several business groups filed a complaint in the Northern District of Texas, including, among others, the U.S. Chamber of Commerce, against the Department of Labor (DOL), seeking to revoke the new final regulations that become effective on April 10, 2017. The regulations define the term "fiduciary" under ERISA, along with the "Best Interest Contract Exemption" and related exemptions that fiduciaries will be required to follow to avoid entering into prohibited transactions under ERISA and corresponding provisions of the Internal Revenue Code as a result of providing certain investment advice to certain retirement plans and IRAs (Fiduciary Rules). The Fiduciary Rules that were published on April 8, 2016, can be found at two links: click here and here.

In Chamber of Commerce of the U.S.A., et al. v. Thomas E. Perez et al., Case No. 16-cv-1476, the plaintiffs assert that the Fiduciary Rules violate the clear Congressional grant of authority to the U.S. Securities and Exchange Commission (SEC) to regulate the financial services industry. The plaintiffs also, among other things, argue that the Fiduciary Rules violate the First Amendment to the U.S. Constitution's right to freedom of speech. Other complaints have also been filed against the DOL to repeal the Final Rules. Two of the other lawsuits, American Council of Life Insurers, et al. v. Thomas E. Perez et al., Civil Action No. 1:26-cv-1530 and Indexed Annuity Leadership Council, et al., v. Thomas E. Perez, et al., Civil Action No. 3:16-cv-01537-N, have been consolidated into Perez. Employers, IRA owners and others that could become subject to these Final Rules (including brokers) should continue to monitor these cases as it is likely they will be appealed, regardless of the results below.

In general, the Final Rules classify individuals that give investment advice or recommendations to retirement plans, including employer-sponsored plans and IRAs (collectively plans), as fiduciaries under ERISA and corresponding provisions of the Internal Revenue Code. As a result, financial advisors such as broker-dealers, insurance agents and similar professionals (advisors) may become fiduciaries to the plans that they advise. Under the Best Interest Contract Exemption (the BICE), advisors can continue to provide investment advice to plans using certain compensation structures without engaging in prohibited transactions. Many of the BICE contractual requirements become effective January 1, 2018.

As a result, and despite any pending litigation challenging the Final Rules to the contrary, employers and their advisors should consider the following next steps:

  1. Current contracts with all advisors should be reviewed to determine whether a fiduciary relationship exists currently and how that may be changed in the event the advisor complies with BICE. 

  2. If a fiduciary relationship already exists, relatively minor changes may be required to any existing contracts once the Final Rules (including BICE) becomes effective. However, the Final Rules should be reviewed in any event to determine what provisions required by BICE may be appropriate in anticipation of the Final Rules. 

  3. Existing fiduciaries may no longer want to provide specific investment advice or otherwise engage in fiduciary activities for a plan. As a result, employers may want to consider whether to secure the investment services of a fiduciary that complies with the new BICE rules. At a minimum, employers should specifically ask how any new advisor anticipates complying with the Fiduciary Rules.

The Final Rules, and BICE in particular, are complex. However, employers and their advisors should consider the following, among other things, when entering into or renewing investment advice contracts:

  • Requiring an acknowledgment of fiduciary status by an advisor, when appropriate, and specifically indicating when an advisor might be a fiduciary with respect to investment advice and recommendations provided to the plan

  • Determining what additional financial and other disclosures might be provided by an advisor in anticipation of (and after) the effective date of the Final Rules in light of the services provided by the advisor

  • Carving out with specificity when an advisor may not be acting as a fiduciary with respect to specific services provided to an employer

  • Carving out services that are unrelated to the provision of investment advice or recommendations to a plan and specifying what standards of conduct may apply to such services provided to a plan.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume VI, Number 201


About this Author

Alexia M. Noble, Polsinelli PC, ERISA Requirements Attorney, Employer Compliance Lawyer, Kansas City

Alexia M. Noble firmly believes that a close relationship with clients and comprehensive knowledge of their company's goals are the keys to successful legal representation. By focusing on the client’s definition of success, she tailors her employee benefits guidance so it is centered on helping the client reach its unique business objectives. She works with clients to navigate the requirements of the Employment Retirement Income Security Act (ERISA) as they structure their employee benefits programs. Prior to joining Polsinelli, Alexia interned at the 22nd Division of...

Henry Talavera, Polsinelli PC, Retirement Plan Implementation Lawyer, Employee Benefits Attorney

Henry Talavera’s experience representing clients before the IRS and U.S. Department of Labor, along with his prior experience as a federal government attorney, enables him to handle complex issues for clients.

Henry has a broad-based, comprehensive practice that involves all areas of employee benefits law related to benefit programs and arrangements for employees, directors, and independent contractors. His extensive experience includes guidance relating to public, private, and tax-exempt employers on the design, implementation, and administration of all types of welfare plans and tax-qualified retirement plans, including defined benefit and plans intended to qualify under sections 401(k), 403(b) and 457(b) of the Internal Revenue Code.