Definition of Fiduciary

Definition of Fiduciary

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Proposed Rule
RIN Number:
Release Date:
October 22, 2010
Closing Date:
January 20, 2011
Department of Labor


This document contains a proposed rule under the Employee Retirement Income Security Act (ERISA) that, upon adoption, would protect beneficiaries of pension plans and individual retirement accounts by more broadly defining the circumstances under which a person is considered to be a ‘‘fiduciary’’ by reason of giving investment advice to an employee benefit plan or a plan’s participants. The proposal amends a 35-year-old rule that may inappropriately limit the types of investment advice relationships that give rise to fiduciary duties on the part of the investment advisor.


Dollar Year
Time Horizon (Years)
Discount Rates
Expected Costs (Annualized)
$1.9 Millions
$2.1 Millions
Expected Benefits (Annualized)
Not Quantified
Not Quantified
Expected Costs (Total)
Expected Benefits (Total)
Net Benefits (Annualized)
Net Benefits (Total)


There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

Criterion Score


1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
A keyword and RIN search turns up the NPRM on Intuitive links on the Labor Department home page also lead to the NPRM. The regulatory analysis is in a section of the NPRM. However, it is very brief, and the NPRM does not make it clear whether this is the RIA or just a summary. A phone call confirmed that this section of the NPRM is the complete RIA.
2. How verifiable are the data used in the analysis?
Estimate of affected entities is sourced to data filed with EBSA, but data are not provided. The rule also references confidential Schedule C data obtained from service provider tax forms. No other data are used.
3. How verifiable are the models and assumptions used in the analysis?
A small number of studies (primarily from the SEC and GAO) are cited and linked in support of theory justifying the regulation. Several academic working papers cited supporting the claim that conflicts generally lead to lower returns. Most numerical assumptions in back-of-the-envelope cost analysis are essentially undocumented, though the calculations themselves are easy to follow.
4. Was the analysis comprehensible to an informed layperson?
The analysis is reasonably readable with few acronyms, though it may require some specialized knowledge to follow. Its principal conclusion is that the regulation will improve investor welfare by classifying more entities as fiduciaries and making enforcement easier. The conclusion is clear, but the scanty analysis has holes that make it hard to follow.


5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
The RIA claims several qualitative benefits: deterrence of conflicts of interest, improved service value, improved ability to redress abuses, and improved ability of plans to recoup losses. "Improved service value" apparently means better returns for investors. There is potential for double-counting here because the department does not clearly distinguish between intermediate outcomes (fewer conflicts, easier enforcement) and the ultimate outcome (better returns for investors). The department is clearly concerned about ultimate effects on investors but a little unclear about what counts as an outcome.
Does the analysis identify how these outcomes are to be measured?
Qualitative benefits are listed but not measured because the department claims they are too difficult to measure. It is clear that improved returns to investors could be a measure. RIA offers one hypothetical calculation that suggests even a small improvement in investment returns may yield large benefits, but does not claim this is an estimate of the regulation's likely effects.
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
The RIA explains how provisions of the regulation are expected to make enforcement easier. It simply asserts that the regulation will reduce harmful conflicts of interest and claims the regulation will improve service value by covering more entities. Why easier enforcement will necessarily reduce the conflicts of interest identified in the SEC and GAO reports is not completely clear. No discussion of how the regulation might affect consumer behavior.
Does the analysis present credible empirical support for the theory?
The RIA presents some evidence that conflicts of interest exist and that they are associated with lower investment returns. The RIA does not present direct empirical evidence that this proposed regulation will produce the desired outcomes.
Does the analysis adequately assess uncertainty about the outcomes?
The RIA acknowledges uncertainty about the size of the benefits, noting that they are difficult to quantify. It offers no formal uncertainty analysis of benefits -- no range of outcomes to show extent of uncertainty.
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
Does the analysis identify a market failure or other systemic problem?
"Need for regulation" section argues that certain consultants and advisors with conflicts of interest make recommendations to defined-benefit plans and do not meet the current definition of "fiduciary;" therefore, they can benefit themselves at the expense of the plan without being prosecuted. The shift from defined-benefit to defined-contribution plans and the increasing complexity of investment products are claimed to make this problem worse and create a need to revise the definition of fiduciary. Argues that the prior regulation does not cover all advisors who have these conflicts of interest.
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
It is plausible that undisclosed conflicts of interest could reduce investors' returns. The RIA theorizes that the problem is more significant with defined-contribution plans because the complexity of choices leads administrators to seek more advice. Plan administrators are apparently the parties who are misled. It is not clear why these sophisticated parties are unable to protect themselves.
Does the analysis present credible empirical support for the theory?
Analysis cites a Securities and Exchange Commission study that found 13 of 24 pension consultants examined have undisclosed conflicts of interest, a Government Accountability Office study that found plans advised by these consultants earned lower returns, and another GAO study that found there are significant opportunities for conflicts of interest in advising defined-contribution plans. These may be evidence of some problem but are based on small samples. No evidence provided for the critical theory that administrators seek more advice under defined-contribution plans than under defined-benefit plans, which is one of the motivations offered for the regulation.
Does the analysis adequately assess uncertainty about the existence or size of the problem?
The problem is assumed to exist with certainty; no discussion of uncertainty about the extent of the problem.
7. How well does the analysis assess the effectiveness of alternative approaches?
Does the analysis enumerate other alternatives to address the problem?
RIA claims the department considered two other definitions of "fiduciary" that are broader than the definition adopted: (1) All persons who render investment advice for compensation, and (2) Include investment advisors who offer a "platform" of investment options.
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
All alternatives involve broadening the definition of "fiduciary"-a small change in the scope of the regulation rather than a different approach. It is not clear how seriously these were considered.
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
Outcomes (benefits) were not quantified for the chosen option or for the other alternatives. The RIA states that each alternative may result in higher fees for all types of advice. No qualitative discussion suggesting which alternative would produce more benefits.
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
There is no discussion of the how the baseline would evolve in the absence of this regulation. Implicitly the analysis assumes the baseline involves no change from the past-even though the continued evolution away from defined benefits plans might suggest the baseline will change in the future.
8. How well does the analysis assess costs and benefits?
Does the analysis identify and quantify incremental costs of all alternatives considered?
Only the compliance review cost of the chosen alternative was calculated. The analysis hints that the alternatives might have higher costs because they would induce some firms to bear the cost of being fidiciaries even if they were not.
Does the analysis identify all expenditures likely to arise as a result of the regulation?
Analysis quantifies only compliance review costs. Some other costs, such as insurance liability, are mentioned but not calculated at all.
Does the analysis identify how the regulation would likely affect the prices of goods and services?
In a few places, the analysis mentions that the costs might be passed through to plans or investors as higher fees, but these are not calculated.
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
RIA mentions that some service providers could exit the market in response to higher costs, but does not estimate this. No discussion of how the regulation might affect investor welfare by affecting the amount of non-misleading advice available.
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
Analysis acknowledges that costs are uncertain but does not provide a range of estimates or any other formal uncertainty analysis.
Does the analysis identify the alternative that maximizes net benefits?
Only one alternative was examined. Neither benefits nor costs were estimated, so net benefits were not calculated and could not be calculated from the information in the RIA.
Does the analysis identify the cost-effectiveness of each alternative considered?
Only one alternative was examined. Outcomes were not quantified and cost-effectiveness could not be estimated.
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
Consulting firms will initially bear costs. The Regulatory Flexibility analysis estimates that most of the entities affected by the regulation would be small firms but does not estimate differential impact on small firms. Analysis occasionally mentions that costs could be passed through to plans or investors, but it goes no further than acknowledging this. Does not address how costs would be distributed among providers or various types of plan participants.
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
Investors are, apparently, the intended beneficiaries. No discussion of differential impact on investors, nor is there any demonstration that the regulation would affect all investors equally. Law firms and insurers might receive transfers, but this is not discussed.


9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
The department undertook this revision to the definition of fiduciary on its own initiative, not in response to a new law. Regulation is predicated on the belief that conflicts of interest exist and can harm investors. The SEC and GAO studies cited in the RIA substantiate this. The NPRM cites these studies and the RIA in support of the regulation, so clearly the department claims the analysis influenced the decision to issue the regulation. Reading between the lines, the actual decision about the regulation also seems to be driven by a desire to make enforcement easier by eliminating the 5-part fiduciary test.
10. Did the agency maximize net benefits or explain why it chose another alternative?
Net benefits are not very clear from the analysis. There is very little qualitative and no quantitative analysis of the alternatives, so it is not possible to compare benefits or costs. A hypothetical calculation suggests benefits could be large, and the (incomplete) costs the department calculated are small. The department does not appear to have seriously considered costs or alternatives.
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
The department makes no commitment to goals or measures, and the RIA is not complete enough to develop goals or measures. One might assess results by examining pension fund performance after controlling for other factors, but since the RIA did not attempt to do this to project results, the department would have to start from scratch.
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
It is not clear that the department has access to systematic data it could use to track progress. Ultimately one would want to know how the regulation affects investor welfare, but the only information cited is one-time studies by the SEC and GAO. The cost analysis is virtually nonexistent. So the department probably has no data it could use going forward.
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