Am I an ERISA Fiduciary?

This is one of the main questions that I get from advisers. 

Or I get an adviser telling me they don’t have to worry about being an ERISA Fiduciary as they are an SEC Fiduciary. 

Now, I don’t have the time in this blog to write about all the reasons that advisers could potentially end up losing their house by thinking they don’t have to worry about being an ERISA Fiduciary because they are an SEC Fiduciary.

And here is the main reason, you can be “personally” liable for your client’s losses as an ERISA Fiduciary, but not as an SEC adviser!

And your client could file a class action lawsuit in a federal court for a breach of ERISA Fiduciary duty but they do not have that same legal protection when you operate as an SEC Fiduciary.

The risks for an adviser are much higher for an ERISA Fiduciary than they are for an SEC Fiduciary!

And this was done purposefully when ERISA law was signed into law in 1974. 

Apparently, Congress and President Ford didn’t think the protections provided to clients as an “SEC Fiduciary” (that were written in 1940) were adequate for employees with money in their workplace plans.

Since the penalties for breaching your duties are much more severe for ERISA Fiduciaries than they are for SEC Fiduciaries, you might be asking yourself, “Am I an ERISA Fiduciary”?

And this is an answer that has changed over time.

In fact, every presidential administration since President Obama has been trying to re-define “who” is an ERISA Fiduciary.

And the answer is a little complicated.

To be an SEC registered fiduciary you just need to pass your series 65 and have more than $100,000,000 in assets under management (AUM).   (There are a few other ways to be an SEC registered firm as well).

But anyone can become an ERISA Fiduciary, regardless of exams passed or how much money they have under management.

There are currently two different ways to become an ERISA Fiduciary.  Both ways can be found under section 3(21)(a) of ERISA.

3(21)(a)(i) and 3(21)(a)(iii) state that if you have discretion over an ERISA covered account or assets (like 401(k) accounts) then you are an ERISA Fiduciary.  This one is pretty cut and dry.  Really easy to understand.  If you are trading a 401(k) account with discretion, then you my friend are an ERISA Fiduciary.  Period.  Full stop.

Now, if you are not trading with discretion, but you are advising your clients on what to do with their 401(k) accounts, it is a little more complicated.  3(21)(a)(ii) defines that if you are providing non-discretionary investment advice to an ERISA covered account or participant, then you “may” be an ERISA Fiduciary. 

In fact, the Department of Labor (DOL) has created a Five Part Test to determine if a non-discretionary adviser is an ERISA Fiduciary.

Here is the test:

(1) providing advice or recommendations regarding purchasing or selling, or the value of, securities or other property for a fee,

(2) on a regular basis,

(3) pursuant to a mutual understanding that

(4) the investment advice will serve as a primary basis for an investment decision,

(5) the advice is individualized

This is the test that every president since Obama has been trying to update and modernize. 

See, the test was written years before the 401(k) even existed.  And decades before “rolling” money into an IRA was en vogue after switching jobs.

But as of today’s date, since the Biden Administration’s changes were “stayed”, this is the test that we need to use.

If you can answer “yes” to all five questions, then you are an ERISA Fiduciary when providing “non-discretionary” advice.

If there are any parts of the test that you can answer “no” to, then you are not an ERISA Fiduciary. 

So, you can provide your clients with personalized, ongoing advice, but not charge them a fee, and you will not be an ERISA Fiduciary.

Or if you provide “models” to all your clients for a fee but you don’t allow for any individualization of the models, then you are not an ERISA Fiduciary.

See, becoming an ERISA Fiduciary is a matter of function, not what license you hold or how much money you manage.

And you are only an ERISA Fiduciary if you have discretion or you are providing non-discretionary services (and pass the Five Part Test) to an “ERISA Covered” account.

If the account is not covered by ERISA law, then you cannot be an ERISA Fiduciary.

So, it is very important to know when you are providing services to an ERISA covered account, whether you are operating as an ERISA Fiduciary or not.  And if you are, you need to follow the ERISA law and rules created by the DOL.  We have a course designed to teach more about all of this as it is too much to cover in a blog.

And if you work for a large RIA or have a broker-dealer affiliation, be sure to double check with them.  They may not allow you to work as an ERISA Fiduciary due to the high risk. 

Also, be sure to double-check your E&O insurance, as many standard policies do not cover you operating as an ERISA Fiduciary.  Oftentimes you need to add a “rider” to your policy.

So, when advisers ask me, “Am I an ERISA Fiduciary”?, my primary answer always is “maybe”!