As Fiduciary Rule Stalls, DOL Advances Amicus Brief Program, Targets Providers

Recent efforts in the courts to treat service providers as fiduciaries aren't a signal that providers should worry for the safety of their nonfiduciary status, but they could be a “warning shot” that the Department of Labor is hungry to expand fiduciary status as it continues to work on crafting its yet-to-be-released fiduciary rule.

Questions of who can become a functional fiduciary under sections 3(21)(A)(i) and 3(21)(A)(iii) of the Employee Retirement Income Security Act have received attention from appellate courts and the DOL in recent months, with the U.S. Courts of Appeals for the Third and Seventh Circuits issuing recent opinions to find that Section 401(k) service providers weren't ERISA fiduciaries under these sections (Leimkuehler v. Am. United Life Ins. Co., 713 F.3d 905 (7th Cir. 2013) Santomenno v. John Hancock Life Ins. Co., 2014 BL 267210, 3d Cir., No. 13-3467, 9/26/14.

Meanwhile, in the regulatory realm, the DOL has found itself in a holding pattern after initially proposing to redefine the term “fiduciary” in October 2010, but withdrawing the proposed rule less than a year later, citing a need to do further economic analysis.

Since then, there has been a flurry of speculation as to when, or whether, the rule, also called the “conflict of interest rule,” will see daylight.

In its fall regulatory agenda released Nov. 21, the department projected it would release the new proposal in January 2015 (see related article in this issue), but it has yet to be sent to the Office of Management and Budget for the requisite 90-day review.

However, many are questioning if it will make it out of the gate with time starting to run out on President Barack Obama's second term and a Republican-controlled Congress.

DOL's Amicus Brief Program 

The DOL's stance on whether retirement plan service providers qualify as ERISA fiduciaries has evolved under the Obama administration. This evolution toward a more expansive fiduciary definition can be traced through the department's amicus brief program.

Although the department hasn't disavowed its 2008 pronouncement that merely creating a list of plan investment options for a plan sponsor's consideration doesn't make a provider an ERISA fiduciary, it has consistently chipped away at this position in seeking to impose fiduciary status on service providers whose activities or authority go beyond the mere creation of an investment menu.

In particular, the department has argued that the following activities cause a service provider to become an ERISA fiduciary: steering retirement plans toward investments in exclusive funds or opportunities; retaining unilateral authority over a plan's investment menu, regardless of whether such authority is ever exercised; retaining authority to direct plan assets into share classes that cause the provider to receive revenue-sharing payments; having “final say” over the funds in which a plan invests; retaining authority to delete or substitute funds from a plan's investment lineup; and setting one's own service provider fees.

The department's efforts have been largely unsuccessful with federal courts. In the past two years, both the U.S. courts of Appeals for the Third and Seventh circuits have dismissed the department's attempt to hold plan service providers to fiduciary status. The Third Circuit even weighed in on the department's ongoing efforts to expand the fiduciary definition, saying that a proposed regulation like the one the department issued in 2010 can't supplant an existing regulation that represented an agency's “considered interpretation.”

2008: Distinction Between Big Menu and Small Menu 

In 2008, under George W. Bush administration Labor Secretary Elaine L. Chao, the department filed an amicus brief with the Seventh Circuit in the first Section 401(k) plan fee case to reach an appellate court.

Although the bulk of the DOL's brief concerned ERISA Section 404(c)’s safe harbor protections for participant-directed investments, the department also weighed in on whether certain Fidelity-related service providers qualified as ERISA fiduciaries through their involvement in the selection of 401(k) investment options.

On that point, the secretary distinguished between creating a large menu of investment options from which plan sponsors could choose and creating the small menu of investment options to be included in a particular plan. While the former activity didn't create fiduciary status in the secretary's eyes, the latter did. 

In particular, the secretary specifically said she didn't think that Fidelity became a fiduciary “merely by virtue of developing and presenting a list of investment options” for the plan sponsor to consider. However, the department went on to say that if Fidelity “in fact made the selection regarding investment options that would be available under the plan,” that would be sufficient to demonstrate that it acted as an ERISA fiduciary.

Both the Seventh Circuit and the district court disagreed with the DOL's position. The Seventh Circuit reasoned that merely “playing a role” in the selection of plan investments or providing professional advice to an ERISA plan wasn't enough to saddle a plan service provider with fiduciary status (Hecker v. Deere, 556 F.3d 575 (7th Cir. 2009)).

Excerpted from a story that ran in Pension & Benefits Daily by Jacklyn Wille and Kristen Ricaurte Knebel (11/21/2014).

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