In April 2016, the Department of Labor (DOL) released the long-awaited final Fiduciary Rule amending the definition of the term “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA). The rule includes a conflict-of-interest rule applicable to retirement investment advice, as well as various exceptions and amendments affecting retirement plan transactions. More than 1,000 pages long, the rule contains much to digest for those in the business of providing advice to businesses and individuals regarding benefit plans and benefit plan investments. While there are ongoing efforts to delay its implementation, the Fiduciary Rule is currently due to become effective in April 2017. While at first glance the rule would appear to primarily impact those who recommend and sell investment products to ERISA plan trustees or beneficiaries, there are also broader implications for CPAs.

Who Is Affected?

The rule covers benefit plans provided by private, for-profit employers and private, tax-exempt employers other than churches providing benefit plans. Individuals holding 401(k) accounts, individual retirement accounts (IRA), and health savings accounts (HSA) that provide investment options are also affected.

The rule applies to defined benefit and defined contribution plans qualified under Internal Revenue Code (IRC) section 401(a), IRAs, and HSAs that provide investment options.

How Has the Fiduciary Definition Changed?

Under Treasury Regulations sections 4975–4979, in place since 1975, individuals or institutions that provided advice to clients on a regular basis about investments in employee benefit plans were subject to the fiduciary standard, and a five-part investment advice test determined whether or not the party was considered a fiduciary adviser. Under the new Fiduciary Rule, the five-part test has been eliminated, and the definition of a fiduciary extends to persons who provide a recommendation about acquiring, holding, disposing of, or exchanging investments in an ERISA plan. It also extends to those providing advice about managing plans and investing plan assets. The rule applies if a fee or other compensation is received for the recommendation, either directly or indirectly.

How Does it Impact CPAs?

CPAs who provide investment advisory services have always been subject to the fiduciary standard. Under the new rule, the fiduciary standard now applies more broadly to anyone who provides recommendations about benefit plans or plan investments to plan sponsors or beneficiaries and to owners of 401(k) and IRA plans. Some examples of commonly provided services that may cause CPAs to be considered fiduciaries under the rule include the following:

  • Recommendations to business clients about changes to existing employee benefit plans
  • Recommendations to individuals about whether or not to hold, convert, or roll over their existing IRAs and 401(K) plans upon retirement
  • Recommendations to clients about the management of real estate held in an IRA.

Areas of practice not impacted by the rule include the issuance of valuations, appraisals, and fairness opinions for employee benefit plans. The DOL has indicated this will be addressed in a separate regulatory initiative.

What Are the Legal Liability Implications?

The rule affords a private right of action to plan sponsors, plan participants, and owners of IRAs. While it is too soon to determine how the rule will affect litigation, lawsuits involving advice about benefit plans might increasingly allege violation of fiduciary duties.

The DOL can likewise bring enforcement actions against advisors to plan sponsors, participants, and beneficiaries who do not provide advice in the best interest of their clients. CPAs who did not previously fall under the fiduciary definition are now exposed to these enforcement actions.

Who Can Management Do?

The Fiduciary Rule prohibits the inclusion of exculpatory language in a written contract limiting an investment advisor’s liability for violation of the contract or precluding the client from participating in a class action lawsuit to enforce the terms of the contract. While this change may not affect litigation, CPA firms that include arbitration clauses in their engagement letters or contracts should have them reviewed by legal counsel to avoid a challenge to the enforceability of these clauses.

CPA firms that employ individuals licensed to sell securities or insurance, or have arrangements with third-party providers to do so, need to carefully investigate application of the new rule. The rule contains extensive guidance regarding the conflict-of-interest rules applicable to commissions, brokerage fees, and certain other types of compensation. Products such as annuities and life insurance are commonly used in estate planning, and their recommendation or sale to IRA owners creates exposure to private rights of action against the CPA firm.

CPA firms that have entered into contracts with investment advisors, securities brokers, financial institutions, or insurance companies should have these reviewed by legal counsel. These contracts may include arbitration provisions or indemnification and hold harmless agreements that are affected by the rule and increase liability exposure. These include “click-through” license agreements and contracts used by online providers.

What Can Insurance Cover?

Professional liability policies should be reviewed to ensure they provide coverage for investment advisory services. In light of the Fiduciary Rule, the ERISA policy exclusion should include an exception for the professional services provided to clients about benefit plans.

CPA firms employing individuals licensed to sell securities or insurance products should carefully evaluate their insurance coverage. Professional liability policies typically exclude coverage for these activities, but coverage is often offered as a supplemental endorsement. Policies provided by securities or insurance brokers for representatives employed by CPA firms should also be reviewed.

Insurance coverage should be reviewed for all third-party providers doing business with the firm related to employee benefit plans. Their exposure to the new rule may have changed. Uninsured or underinsured third-party service providers elevate the risk to CPA firms, as aggrieved parties will pursue all available means of recovery in pursuing investment losses.

CPA firms also should evaluate coverage under fiduciary liability policies purchased to protect sponsors of their own employee benefit plans.

What Can Help?

The details of the Fiduciary Rule are complex and go well beyond the scope of this article. Members of the AICPA Personal Financial Planning Section can access many useful and contemporary resources on the AICPA website, and additional resources will become available through the AICPA over time. Training courses on compliance with the rule will be useful; firms should especially consider courses tailored to the types of advisory services offered to plan sponsors, plan participants, and individual owners of IRAs and 401(k)s.

CPA firms should consult with legal counsel regarding engagement letters and contracts entered into with both clients and third-party providers that involve advisory services on benefit plans and plan investments. Finally, CPA firms should review their existing insurance coverage and consult with their insurance agent or broker. Policy limits may need to be increased, and gaps in coverage may need to be filled.

Stanley Sterna, JD is a vice president at Aon Affinity, Chicago, Ill.
Joseph Wolfe is a risk management consultant at Aon Affinity, Chicago, Ill.