The Department of Labor’s recent Proposed Rule (the “Proposal”), which defines the term “fiduciary” as it applies to persons who provide “investment advice” to ERISA plans and IRAs, will impact the likelihood and severity of fiduciary litigation against life insurers and their agents. This article summarizes that potential impact, and will be supplemented periodically with updates focused on particular elements of the Proposal not covered here.
Under ERISA’s statutory scheme, fiduciary responsibility cannot be enforced against a defendant in litigation unless that defendant can be classified as a fiduciary with respect to the wrongdoing for which the remedy is sought. The statutory definition provides that a person is an investment advisory fiduciary with respect to a plan, only to the extent he or she, “renders investment advice for a fee or other compensation direct or indirect, with respect to any moneys or other property of [the plan] , or has any authority or responsibility to do so.” (ERISA {} 3(21)(A))
In 1975, the Department of Labor (DOL) promulgated regulations further defining and limiting the status of an “investment advice” fiduciary to one who renders such advice on a regular basis pursuant to an agreement with the plan or participant with the understanding that such advice will form the primary basis for investment decision making. This definition has enabled persons who sell insurance or securities to a plan—and who do not otherwise exercise discretion or control over plan assets, nor provide the regular advice referred to in the 1975 Rule—to avoid the designation and potential litigation exposure of being a fiduciary.
As promulgated, the Proposal would make significant changes to the two key fiduciary features of ERISA legislation: (1) fiduciary status; and, (2) fiduciary standards. The Proposal creates a new and complex construct for the continued sale of variable and fixed annuities and mutual funds, among other products, particularly in the IRA plan market. If enacted, it will require a costly “compliance” structure imposing new duties on insurance agents, brokers, and the insurers they represent. From a litigation analysis perspective, it is most relevant that insurers face a serious potential increase in litigation or arbitration as a result of the Proposal’s new definition of “investment advice” coupled with a corresponding expansion of the definition of a “fiduciary,” and a proposal, with respect to variable products (and potentially fixed as well) to effectively legislate a new cause of action for ERISA and IRA plans, participants, and owners.
This article focuses primarily on the impact the Proposal will have, if ultimately enacted, on ERISA and IRA litigation. But, where appropriate, I will also offer my views as to whether the Proposal is consistent with ERISA statutory authority, the substantial case law since its enactment, and applicable precedents relating to the authority to promulgate such a fundamental change in the application of ERISA.
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