The Implication of the 408(b)(2) Proposed Regulation—Disclosing Fiduciary Status

By Stephanie Bennett

Under the proposed 408(b)(2) regulation, advisers will have to disclose whether or not they will provide any services to the plan as a fiduciary under ERISA or under the Investment Advisers Act of 1940. This disclosure must be made before a fiduciary for a retirement plan can enter into a contract or arrangement with an adviser for services (referred to as a “service agreement”). The failure to do so would cause the service agreement to be a prohibited transaction.

While many advisers will be performing some tasks as fiduciaries under either ERISA or the Investment Advisers Act of 1940, it may be possible that an adviser does not perform any fiduciary tasks and therefore will not be acting as fiduciary. And, some advisers will be performing both fiduciary and non-fiduciary tasks. It is important that advisers recognize and document the distinction between the fiduciary tasks that they are performing and those that are non-fiduciary tasks.

ERISA’s definition of fiduciary is a functional definition. That means that, even if an individual does not acknowledge that he is acting as a fiduciary, if he performs fi duciary tasks, he is an ERISA fiduciary in the performance of those tasks. Because this functional definition can result in unintended fiduciary status, careful advisers need to understand which activities cause fiduciary status and which activities do not—and clearly spell that out in their service agreements. (Another important requirement in the 408(b)(2) proposed regulation is that every covered provider—including every advisers— have a written contract or arrangement with the responsible plan fiduciary.)

For example, under ERISA section 3(21)(A)(ii), providing individualized investment advice to a retirement plan for a fee is a fiduciary task. It is important that the adviser appreciate that the definition of fiduciary investment advice under ERISA requires that the advice be individualized and based on the particular needs of the plan. So there is a possibility that an adviser could give investment advice which is not deemed fiduciary investment advice under ERISA (e.g., the adviser provides generic investment advice that is not individualized and not based on the particular needs of the plan and, therefore, is not fiduciary investment advice).

Advisers providing fiduciary investment advice must disclose that they are acting as ERISA fiduciaries when performing that task. However, many advisers perform other tasks for their clients. For example, it is not uncommon for advisers to perform vendor searches, to provide plan design consultation, and to educate participants and plan sponsors. Assisting plan sponsors with vendor searches, consulting on plan design and providing education services are not fiduciary tasks.

Remember that the proposed regulation requires that the disclosure take place prior to entering into a service agreement with the responsible plan fiduciary. In drafting agreements for advisers we discuss multiple approaches for complying with the disclosure requirements. One approach we discuss is providing the disclosure in the agreement with an acknowledgement that the contents of the agreement itself serves to satisfy the disclosure requirements. Another method is for the adviser to develop a separate set of disclosures which are provided to the responsible plan fiduciary prior to entering into an agreement. In that case, the separate disclosures (for example, an RIAs ADV Part II) must be referenced in the agreement and the disclosures that are contained in the ADV must be explained.

© 2008 Reish Luftman Reicher & Cohen, A Professional Corporation. All rights reserved. The ADVISER REPORT is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.

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