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CCH® PENSION — 05/12/11

Proposed fiduciary regs criticized by GOP, defended by Borzi

Top congressional Republicans have released a letter critical of recently issued proposed Labor Department regulations on the definition of "fiduciary." The proposed rules were defended by Phyllis Borzi, Assistant Secretary of Labor of the Employee Benefits Security Administration (EBSA), in an article posted on the EBSA website.

The proposed regulations, issued by EBSA in October 2010, would more broadly define the circumstances under which a person is considered a "fiduciary" under ERISA by reason of giving investment advice to an employee benefit plan.

Proposed rules "unworkable" say GOP lawmakers

In the letter, sent on April 14, 2011, to the heads of the Treasury Department, IRS, and Labor Department, top Republican lawmakers in the House and Senate characterized the proposed rules as "unworkable" because they create "too many unanswered questions as to who is and who is not a fiduciary."

By broadening and expanding the definition of "fiduciary," the proposal "completely flips the regulatory structure so that a person would be presumed to be a fiduciary," said the letter, which is authored by Rep. John Kline, Chairman of the House Committee on Education and the Workforce, Rep. Dave Camp, House Ways and Means Committee Chairman, Sen. Michael Enzi, ranking member of the Senate Health, Education, Labor, and Pensions Committee, and Orrin Hatch, ranking member of the Senate Finance Committee. "We are concerned that the bright-line regulatory test and guidance that has governed for the past thirty-five years is being discarded in a manner that is very likely to bring considerable disruption in the service provider and plan sponsor community," the letter charged.

In addition, the lawmakers expressed "significant concerns" that: (1) the economic analyses prepared for the proposed rules are "significantly flawed" because of the failure to look at regulatory burdens imposed on small business; (2) the economic analyses did not separately address the proposed regulations' effects on the availability and cost of services to individuals owning IRAs; (3) "No thorough vetting or coordination was undertaken by the [Labor] Department with other federal regulators to avoid duplicative, overlapping, or conflicting regulatory environments for service providers"; and (4) the proposed rules raise questions about the types and forms of financial literacy and education that will be permitted.

Update to regulations necessary, says Borzi

In an article published on the EBSA website, Phyllis Borzi said that the existing rules were developed at a time when most retirement plans were defined benefit plans; 401(k) plans didn't exist and individual retirement accounts were just starting up. "Now the majority of retirement plan assets are in 401(k) plans where participants shoulder most of the investment responsibility, regardless of their financial sophistication," Borzi said.

Under the current rules, a person must satisfy a five-part test in order to be considered a fiduciary rendering investment advice. Among the key elements of the five-part test is the requirement that the advice be given on a regular basis and pursuant to a mutual understanding that the advice would be the primary basis for the investment decision. This means that advice given infrequently, however flawed or conflicted, is "seldom actionable" by the Labor Department, Borzi explained. Moreover, she said, unless both the plan official and the adviser understand that the advice serves as a primary basis for the investment decision, advisers who base their advice on their own financial interests rather than the plan's can't be held accountable under ERISA for the resulting losses. Consequently, Borzi argued, "plan sponsors and participants are often left holding the bag for damages caused by conflicted advice, even in cases where the adviser might have represented that the advice was covered under ERISA."

To fix this problem, said Borzi, EBSA has proposed a new rule "that more closely reflects Congress' decision in 1974 as to when investment advisers are "fiduciaries" to the plans they serve." The proposed rules would remove the "regular basis" and "primary basis" requirements to give added protection to both employees who participate in retirement plans and to the businesses that offer them, Borzi said.

Source: Letter to Hilda Solis, Timothy Geithner, and Douglas Shulman, from Rep. John Kline, Rep. Dave Camp, Sen. Michael Enzi, and Sen. Orrin Hatch, April 14, 2011, released by the American Benefits Council. EBSA Published Article, "Time to update ERISA fiduciary rule," Phyllis Borzi, April 18, 2011.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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