evolution slide6-01-1

As everyone in the ERISA world knows,  the Department of Labor (DOL) on April 20, 2015 published a proposed regulation in the Federal Register relating to the definition of fiduciary within the meaning of ERISA section 3(21)(A)(ii). ERISA section 3(21)(A)(ii) is that part of the definition of fiduciary that addresses investment advice for a fee or other compensation.

If you’re not part of our ERISA world, my guess is that you would have probably heard about it or read about in terms other than the above-referenced legal title. Most likely, you’ve probably heard it called the “Fiduciary Rule”, the “Fiduciary Standard”, “Conflict of Interest Rule”, or some other name depending on one’s point of view or financial interest.It’s become the most controversial ERISA regulation in recent memory.

But I’m not here to express a point of view – political, economic, or otherwise. Rather, this article is my attempt to put it all into context by providing a timeline of how it got to where it is today. Context, after all, can help planning.

The Common Law of Trusts: The Beginning

ERISA, or course, codified a fiduciary relationship with respect to employee benefit plans that provide retirement income or welfare benefits. The core principles of which are derived from the common law of trusts, the law of trusts that developed over time from the ruling of judges rather than by statutes enacted by legislatures.

Much of the common law of trusts originated in England, but an 1830 case decided by the Supreme Court of Massachusetts, Harvard College v. Amory, was an important decision relating to the meaning of prudence. It’s believed that this case was the first time the “Prudent Man Rule” was articulated.

Prohibited Transaction Exemption (PTE) 75-1

ERISA and the Internal Revenue Code (the “Code”) didn’t incorporate all of the core principles of the common law of trusts and added two key components.

First, the ERISA prudence standard is a prudent expert standard. (Memo to plan sponsors who want to  self-manage plan assets, but do not have in-house expertise).

Second, Congress recognized that modifications had to be made because of the unique nature of employee benefit plans. One of those modifications was to prohibit a broad group of activities and transactions between an employee benefit plan and a “party in interest “under ERISA and a “disqualified person” under the Code. The violation of which could result in an excise tax.

Because of the broad scope of prohibited transactions, investment providers would effectively be unable to perform their duties unless there were statutory and Department of Labor exemptions. The DOL did exactly that in PTE 75-1 which provided an exemption to employee benefit plans and broker-dealers and banks from certain of the prohibited transactions of ERISA and excise taxes.

December, 2006 Government Accounting Office Fee Report

But PTE 75-1 was, of course, before Congress added Section 401(k) to the law as part of the Revenue Act of 1978 followed by IRS regulations in 1981. By the end of 2005, the Investment Company Institute reported that 401(k) plans had more active participants and about as many assets as all other private pension plans combined. The numbers were significant:

  • 47 million people participating
  • in 417,000 plans
  • with approximately $2.5 trillion in assets.

No surprise then that fees, disclosures and conflict of interest became part of the public consciousness. In December, 2006, Government Accounting Office (GAO) issued its report, Changes Needed To Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees.

The GAO Report was commissioned by Rep. George Miller, D-Cal. The Congressman announced that the House Education and the Workforce Committee that he was in line to chair under the new Democratic-controlled Congress should hold hearings in 2007 to examine the “fee issue”. I described it back then as a shot fired across the 401(k) industry bow.

Indeed, in March 2007, 401(k) fees officially became part of the political debate Congressman Miller held hearings with comments falling across party lines. The Democrats using verbiage such as “hidden fees erode retirement savings”, and the Republicans saying more information is confusing.

Proposed Amendment of PTE 75-1 in 2010

Then three years later, the DOL proposed a change to the definition of fiduciary that would have expanded the scope of those who become fiduciaries. Significant objections were voiced by numerous industry groups and by Members of Congress from both parties. The DOL withdrew its initial proposal and stated it would conduct further economic analysis.

In February 2015, President Obama announced that the DOL should move forward with its proposed rule making. But before we fast forward those five years, two events in 2013 put 401(k) plans right back into the public consciousness.

2013: The Year of the Headline

The first event was the PBS Frontline documentary, The Retirement Gamble, aired on April 25, 2013 by investigative reporter, Martin Smith. The documentary created a firestorm of comment on the state of retirement and was highly critical of the financial services industry.

Later that year in November 2013, Forbes added a seasonal touch in an article saying

PBS ran it again in late October–just in time for Halloween. It revealed a scary picture on the state of retirement and all its shortfalls including the big costs that come with a 401(k). It’s hard to watch this program without a sense of horror at the way our retirement plan system is rigged to rip off Americans struggling to save for retirement.

There were, of course, less emotional and more reasoned responses. One of which was fee-based financial planner, Roger Wohlner who in his blog post, My Thoughts on PBS Frontline The Retirement Gamble, pointed out where the documentary fell short.

Then in July, Yale law professor Ian Ayres mailed 6,000 letters to plan sponsors warning them they are paying too much for their 401(k) plans and encouraging them to make changes with the threat of exposure in some versions of the letter. The letter included a draft of a white paper written by Ayres and Prof. Quinn Curtis, an associate professor of law at the University of Virginia School of Law, entitled: Measuring Fiduciary and Investor Losses in 401(k) Plans.

While the industry view was that the study was terribly flawed, it once again put 401(k) plans and the financial service industry back into the spotlight.


Now back to the present. In February, 2015, the White House released a Council of Economic Advisors Report, The Effects of Conflicted Advice on Retirement Savings, indicating that the aggregate annual cost of conflicted advice is approximately $17 billion each year

On April 14, 2015, the DOL announced a re-proposal of the rule, which is now followed by a period for public comment. The DOL responded to demands from members of both parties in Congress by extending the original comment period and indicating that a public hearing will begin the week of August 10. It is likely that changes will be made when the Rule is finalized.

Nobody knows for sure how the re-proposed rule will actually affect 401(k) plan sponsors, participants, or the financial service industry. Opinions, of course, are not in short supply. The actual impact will play themselves out over time. But there is one thing about which I am confident. Retirement plan service models will change.