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Exclusive Interview: Boston ERISA Legal Author Stephen Rosenberg Explains DOL’s New Fiduciary Definition

January 11
00:03 2011

In October of 2010, as the Securities and Exchange Commission was conducts its own public comment period on the fiduciary standard, the Department of Labor (DOL) issued its proposed new definition of Fiduciary. This raised many questions as Money In God We Trustto which department really controls the term “fiduciary” and what might happen if the two definitions do no reconcile. Fiduciary News asked Stephen Rosenberg, publisher and author of the Boston ERISA and Insurance Litigation Blog, if he would mind sharing his views with our readers. Mr. Rosenberg is a partner at the McCormack Firm in Boston where he focuses on ERISA litigation, including breach of fiduciary duty cases. What he says might surprise advisers, plan sponsors and even the DOL. Here’s the transcript of our exclusive interview.

FN: Given the SEC is in the process of reviewing public comment on this very topic as directed by Dodd-Frank, do you think the DOL has upstaged the SEC?

Rosenberg: No. The DOL under the current administration has set out on a course to modernize and refine the fiduciary structure under ERISA, particularly as it relates to defined contribution plans. This is a necessary and reasonable piece of that puzzle, without regard to what actions the SEC may or may not take.

FN: What are some of the implications of the new definition that will change the way advisers do business?

Rosenberg: At the end of the day, the most likely outcome is simply that advisers will have to be more willing to accept the risk of becoming a fiduciary with regard to the services they are directly providing, and it will be harder to create a scenario in which they can sell their services while still disavowing that status.

FN: What are some of the implications of the new definition that will change the way plan sponsors handle their plans?

Rosenberg: It depends to a large extent on the sophistication of the particular plan sponsor. For larger, more sophisticated sponsors, who have their own in-house expertise, they have likely always viewed input from their advisers with some skepticism, and while they factor it in, are not giving it sole weight in their decision making. They will probably treat the regulatory expansion of the adviser’s potential fiduciary status as, at least, one more factor in considering how much credence to give to the input from advisers and possibly also as an avenue to take action against the adviser if the adviser leads them astray. For smaller plan sponsors it should give them an opportunity to get better advice, but it should not replace their primary tool in this regard, which should be to find trustworthy advisers who they can rely on in the first place; they should not simply be relying on the fact that the adviser could be a fiduciary and be at risk in that manner as a guaranty of sorts of the advice being provided.

FN: What are some of the implications of the new definition that will change the way plan participants invest?

Rosenberg: Ideally, it will lead to better advice plan participants can feel more confident in relying on and to investment options they can have more confidence in. That said, though, an ounce of prevention is worth a pound of cure, and plan participants should not assume the courts, by means of claims alleging breaches of fiduciary duty, will set things right after the fact. That is a long and hard road. Plan participants will continue to need to do their own due diligence, and decide whether an investment is right for them.

FN: What’s the single most important take away you see from the DOL’s new definition?

Rosenberg: It is very simple – advisers are more and more likely to find themselves in the crosshairs as fiduciaries if there is a problem with an investment, and they need to account for this in all aspects of their business model, from insurance to pricing to the quality of the work they perform and the quality of the advice they provide.

FN: Do you feel there’s still a loop-hole with the Frost Advisery Opinion (the one that permits self-dealing transactions like accepting 12b-1 fees)?

Rosenberg: That’s a good question, just more complicated than I have time to work through today. I am not really in a position right now to answer it at the moment.

FN: Is this issue even on the radar of plan sponsors and participants?

Rosenberg: I think plan sponsors – at least the more sophisticated ones – have long been aware advisers may not always solely have their interests at heart. There is nothing wrong with that, in most instances. That is the nature of business, and the good advisers know the key to the relationship is the win/win transaction, one where their advice is both good for the plan sponsors and plan participants and simultaneously sufficient to win the business they are seeking. In that regard, the defined contribution marketplace is no different than any other; in an ideal world, and hopefully more often than not, better advisers who are providing better advice and better investment products rise to the top, raising plan quality at the same time. We all know that is not always the case – and if it was, we would not have litigation – but the change in the definition can only help this dynamic.  From this perspective, whether conscious of a need to alter the regulation or not, I think plan sponsors have long been aware of the dynamic that lies behind this change.

With regard to plan participants, there is obviously a broad range in the sophistication of participants. Again, while I doubt many if any participants have been aware of the regulation itself or the need to revise it, the more knowledgeable ones have certainly been aware of the potential for conflict that the regulatory change seeks to reduce, and would certainly welcome it.

FN: If you could ask the DOL to change one thing about their new definition, what would that be?

Rosenberg: It isn’t so much a change, as it is a question and a concern. It is important that the DOL have carefully considered whether this may reduce the number of advisers, or result in more concentration in the industry, by raising the barrier for entry or making it too risky for some players to remain in the game. It is certainly a field where having more quality advisers is better than having fewer, in that competition among advisers cannot help over time but lower the costs of investing for plan participants and the quality of the advice being provided to plan sponsors. I would hope that potential aspect has been carefully considered, and that the DOL be prepared to tweak the language if experience shows that it has the unintended effect of narrowing the adviser market more than is necessary.

FN: Do you have any other comments, thoughts or suggestions on this topic?

Rosenberg: At the end of the day, we can make all the regulatory changes we want. Nonetheless, the only real protection for plan participants is vigorous exercise by plan sponsors of their fiduciary functions. They are the only ones in a position to truly vet the information that comes in from the adviser market, and to structure a plan properly in response to it. It needs to be treated as seriously as any other core business function, if not more so, and not relegated to the “soft” realm of employee benefits. Certainly, these types of changes can help plan sponsors perform this role well, but they cannot make up for or replace the need for eternal vigilance by plan sponsors.

FN: Stephen, thank you for taking the time for providing your insights. They provide a perspective that may be new to many.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Mike Alfred
    Mike Alfred January 11, 23:01

    This is an excellent interview. Thanks for putting it together, Chris.

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