Dear Mr. Stapley:
This is in response to your request for guidance concerning the
fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974, as amended (ERISA). You have requested guidance
concerning the responsibilities of plan fiduciaries regarding the advice
and other services provided directly to plan participants by financial
planners or advisers. For purposes of this letter, we assume that the
planner or adviser is neither chosen nor promoted by plan fiduciaries and
is not otherwise a fiduciary with respect to the plan. In that context,
you ask a number of questions.
The relevant statutory provisions are as follows. Section 3(21)(A) of
ERISA provides that a person is a fiduciary with respect to a plan to the
extent (i) he exercises any discretionary authority or discretionary
control respecting management of such plan or exercises any authority or
control respecting management or disposition of its assets, (ii) he
renders investment advice for a fee or other compensation, direct or
indirect, with respect to any moneys or other property of such plan, or
has any authority or responsibility to do so, or (iii) he has any
discretionary authority or discretionary responsibility in the
administration of such plan.
Sections 403(c)(1) and 404(a) of ERISA require, among other things,
that the assets of a plan be held for the exclusive purpose of providing
benefits to participants and beneficiaries of the plan and defraying
reasonable administrative expenses of administering the plan, and that a
fiduciary with respect to the plan carry out his duties for the exclusive
purpose of providing benefits to participants and beneficiaries.
Where an individual account pension plan permits a participant or
beneficiary to exercise control over the assets in his or her account and
a participant or beneficiary exercises such control, section 404(c)
provides that no other person who is otherwise a fiduciary shall be liable
for any loss, or by reason of any breach, which results from such
participant’s or beneficiary’s exercise of control.
Section 405(a) of ERISA provides that a fiduciary of a plan may be
liable for a breach of fiduciary responsibility committed by another
fiduciary of the plan: (1) if he knowingly participates in, or knowingly
undertakes to conceal, an act or omission of such other fiduciary, knowing
such act or omission is a breach; (2) if, by his failure to comply with
section 404(a)(1) of ERISA in the exercise of his fiduciary obligations,
he has enabled such other fiduciary to commit a breach; or (3) if he has
knowledge of the breach by such other fiduciary, unless he makes
reasonable efforts under the circumstances to remedy the breach.
Section 406(a) of ERISA prohibits various types of transactions between
a plan and persons who are parties in interest with respect to the plan.
In particular, section 406(a)(1)(D) prohibits a fiduciary from engaging in
a transaction if the fiduciary knows or should know that the transaction
is a direct or indirect transfer to, or use by or for the benefit of any
party in interest, of the assets of the plan. Section 406(b) of ERISA
prohibits a fiduciary with respect to a plan from dealing with assets of
the plan in his own interest or for his own account, acting on behalf of
or representing a party dealing with the plan in a transaction involving
the assets of the plan, or receiving any consideration for his own
personal account from any party dealing with the plan in connection with a
transaction involving the assets of the plan.
The following is a summary of the questions presented in your letter
and our responses thereto.
Question 1: Is an individual who advises a participant, in exchange for
a fee, on how to invest the assets in the participant’s account, or who
manages the investment of the participant’s account, a fiduciary with
respect to the plan within the meaning of section 3(21)(A) of ERISA?
Answer: The Department has stated on numerous occasions that directing the
investment of a plan constitutes the exercise of authority and control
over the management or disposition of plan assets and that the person
directing the investments would be a fiduciary, even if the person is
chosen by the participant and has no other connection to the plan. In
addition, regulation 29 CFR § 2510-3.21(c) further clarifies the meaning
of the term “investment advice.” Under that regulation, a person will
be deemed to be rendering investment advice if such person renders advice
to the plan as to the value of securities or other property, or makes a
recommendation as to the advisability of investing in, purchasing, or
selling securities or other property and such person either directly or
indirectly has discretionary authority or control, whether or not pursuant
to an agreement, arrangement or understanding, with respect to purchasing
or selling securities or other property for the plan; or renders any such
advice on a regular basis to the plan pursuant to a mutual agreement,
arrangement or understanding, written or otherwise, between such person
and the plan or a fiduciary with respect to the plan, that such services
will serve as a primary basis for investment decisions with respect to
plan assets, and that such person will render individualized investment
advice to the plan based on the particular needs of the plan regarding
such matters as, among other things, investment policies or strategy,
overall portfolio composition, or diversification of plan investments. The
Department has taken the position that this definition of fiduciary also
applies to investment advice provided to a participant or beneficiary in
an individual account plan that allows participants or beneficiaries to
direct the investment of their accounts. 29 CFR § 2509.96-1(c).
In the context of a participant-directed individual account plan
meeting the requirements of ERISA section 404(c), a person, such as a
financial planner or investment manager or adviser, who is selected by a
participant to manage the participant’s investments would be liable for
imprudent investment decisions because those decisions would not have been
the direct and necessary result of the participant’s exercise of
control, even though the participant selected the person to manage the
assets in his or her individual account.(1)
The other fiduciaries of the plan
would not be liable as fiduciaries for either the selection of the
investment manager or investment adviser or the results of the investment
manager’s decisions or investment adviser’s recommendations.(2)
Nor would
the plan fiduciaries have any obligation to advise the participant about
the investment manager or investment adviser or their investment decisions
or recommendations. See 29 CFR § 2550.404c-1(f) – Example (9).
Question 2: Does a recommendation that a participant roll over his or
her account balance to an individual retirement account (IRA) to take
advantage of investment options not available under the plan constitute
investment advice with respect to plan assets?
Answer: It is the view of the Department that merely advising a plan
participant to take an otherwise permissible plan distribution, even when
that advice is combined with a recommendation as to how the distribution
should be invested, does not constitute “investment advice” within the
meaning of the regulation (29 CFR § 2510-3.21(c)).(3) The investment advice
regulation defines when a person is a fiduciary by virtue of providing
investment advice with respect to the assets of an employee benefit plan.
The Department does not view a recommendation to take a distribution as
advice or a recommendation concerning a particular investment (i.e.,
purchasing or selling securities or other property) as contemplated by
regulation § 2510.3-21(c)(1)(i). Any investment recommendation regarding
the proceeds of a distribution would be advice with respect to funds that
are no longer assets of the plan.(4)
Where, however, a plan officer or someone who is already a plan
fiduciary responds to participant questions concerning the advisability of
taking a distribution or the investment of amounts withdrawn from the
plan, that fiduciary is exercising discretionary authority respecting
management of the plan and must act prudently and solely in the interest
of the participant.(5)
Moreover, if, for example, a fiduciary exercises
control over plan assets to cause the participant to take a distribution
and then to invest the proceeds in an IRA account managed by the
fiduciary, the fiduciary may be using plan assets in his or her own
interest, in violation of ERISA section 406(b)(1).
Question 3: Would an advisor who is not otherwise a plan fiduciary and
who recommends that a participant withdraw funds from the plan and invest
the funds in an IRA engage in a prohibited transaction if the advisor will
earn management or other investment fees related to the IRA?
Answer: No. For the same reasons explained above, a recommendation by someone
who is not connected with the plan, that a participant take an otherwise
permissible distribution, even when combined with a recommendation as to
how to invest distributed funds, is not investment advice within the
meaning of the 29 CFR § 2510-3.21(c), nor is such a recommendation, in
and of itself, an exercise of authority or control over plan assets that
would make a person a fiduciary within the meaning of section 3(21)(A) of
ERISA. Accordingly, a person making such recommendations would not be a
fiduciary solely on the basis of making such recommendations, and would
not engage in an act of self-dealing if he or she advises the participant
to roll over his account balance from the plan to an IRA that will pay
management or other investment fees to such person.
However, as indicated above with respect to question 2, this position
applies only to advice provided by a person who is not a plan fiduciary on
some other basis. Advice of this nature given by someone who is already a
fiduciary of the plan would be subject to ERISA's fiduciary duties.
Moreover, if the person exercised control over the participant's account
in making the distribution and reinvestment outside the plan, the person
would be a fiduciary and would be subject to the ERISA's fiduciary
obligations.
This letter constitutes an advisory opinion under ERISA Procedure 76-1
(41 Fed. Reg. 36281, August 27, 1976). Accordingly, this letter is issued
subject to the provisions of the procedure, including section 10 relating
to the effect of advisory opinions.
Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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See Advisory Opinion 84-04A, January 4, 1984 (AO 84-04A). In
particular, AO 84-04A stated that if a person is deemed to be giving
investment advice within the meaning of regulation § 2510.3-21(c)(1)(ii)(B), the presence of an unrelated second
fiduciary acting on the investment advisor’s recommendations on
behalf of the plan is not sufficient to insulate the investment
advisor from fiduciary liability under section 406(b) of ERISA.
Regulation § 2510.3-21(c)(1)(B) presupposes the existence of a second
fiduciary who by agreement or conduct manifests a mutual understanding
to rely on the investment advisor’s recommendations as a primary
basis for the investment of plan assets. In the presence of such an
agreement or understanding, the rendering of investment advice
involving self-dealing will subject the investment advisor to
liability under section 406(b) of ERISA. We believe that the same
principles enunciated in AO 84-04A apply in the context of a financial
planner or investment advisor rendering investment advice to a
participant in a participant-directed plan.
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Other fiduciaries of the plan may have co-fiduciary liability of the
plan if, for example, they knowingly participate in a breach committed
by the participant's fiduciary. ERISA section 405(a).
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We note that a person recommending that a participant take a
distribution may be subject to Federal or state securities, banking or
insurance regulation.
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In the view of the Department, the situation described herein is
distinguishable from those situations where a plan fiduciary exercises
control over the timing of the distribution, the selection of the
individual retirement plan provider and the products in which the
distributions will be invested. For example, situations such as those
involving automatic rollovers of mandatory distributions. See 29 CFR
§ 2550.404a-2 (69 FR 58018, September 28, 2004). See also, AO 93-24A
(September 13, 1993) and the letter from Robert J. Doyle to Judith
McCormick, August 11, 1994.
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See Varity Corp. v. Howe, 516 U.S. 489, 502-03 (1996).
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