"I talked to the Labor Department and their view is 'We are applying the five-part test as it’s actually written,'" Campbell recounted during a webcast this week.
"If you apply those five parts, I think you’ll see for 401(k) plans and other ERISA plans at least, that basically, even if you are a registered representative, even if you are an insurance agent, If you’re regularly providing advice, telling them what the investments in the plan should be, that is going to trigger fiduciary status."
The now-reinstated 1975 five-part test (part of the Employee Retirement Income Security Act, ERISA) considers advice to meet the “fiduciary” standard if it is:
Regarding the value of securities or other property, or as to the advisability of investing in, purchasing or selling securities or other property.
Provided on a regular basis.
Provided pursuant to a mutual agreement or understanding, written or otherwise.
A primary basis for investment decisions.
Individualized, based on the particular needs of the investor.
No. 2 is the sticking point: "provided on a regular basis." An agent or broker doing simple follow-up, or meeting with regular clients who have questions about a product previously sold might now be meeting that prong if the DOL is adopting a strict interpretation.
"Over time, say over 20 or 30 years, we’d fallen into using a sort of shorthand that was probably not correct," Campbell said, "which was if you were an advisor on the sales side, if you were a registered representative or an insurance agent, or somebody in that capacity, typically, I think the industry viewed it as this person was not going to be an ERISA fiduciary even when they were advising 401(k) plans on a regular basis."
The DOL fiduciary rule was tossed out by an appeals court March 15.
What Is At Stake
ERISA allows plan participants and beneficiaries to bring claims for breach of fiduciary duty. Examples include self-dealing and failing to inform a client of a better investment option. Claims are brought in the form of a lawsuit.
It would be good for the industry as a whole if the DOL would issue more guidance to clarify how it will interpret the five-part test going forward, said Jamie Hopkins, Retirement Income Program co-director at The American College.
"There does appear to be a notion that the current DOL views the five-part test as different than it was viewed in the past," he said. "It is really courts that enforce this aspect, so if this is going to change significantly, we would need some more guidance from DOL."
One positive for agents and advisors is the DOL rule came within an eyelash of taking full affect. That means the industry had three years of preparation and conversion to a documentation-and-disclosure system to protect producers from breach-of-fiduciary claims.
The industry reached a general consensus that rigorous documentation of recommendations is the best way to avoid liability exposure.
Jason Smith, CEO and founder of Clarity 2 Prosperity, an independent marking organization, plans to stay the course. That means Clarity's agents and advisors will be doing more documentation and spending more time than is necessary for the time being.
"We’re still very focused given that the SEC’s proposed best-interest rule is still out there and we feel it’s got legs," Smith said. "We feel the fiduciary movement has been coming for a long time and the awareness that the DOL rule brought to it just expedited the process of advisors paying attention to the best-interest process."
A famous quote from hockey legend Wayne Gretzky sums up the Clarity plan, Smith said.
"We want to be where the puck is going," he said. "When they're ready, we'll be there."
Those advisors handling rollovers can be confident returning to business as usual, Campbell added.
With the fiduciary rule out of the way, a previous 2005 guidance dealing with rollovers is once again the rule of law, Campbell said.
"That 2005 advisory opinion said that, generally, rollover advice is not fiduciary advice with the exception of when that rollover is being advised on by a person who’s already a fiduciary to the plan," he explained.
But most rollover advice is one-time advice, and not subject to the five-part standard.
Likewise, for many agents executing the random annuity transaction with no follow-up, the five-part test might be a nonissue. They can return to business as usual.
The question becomes what their distributors will do. Many independent marketing organizations were well down the path to new compliance systems when the DOL rule was overturned.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]