Is an investment advisor who gets no fee an ERISA plan’s fiduciary?

I hope BenefitsLink neighbors will help me provide without-fee legal advice to someone who would, without fee, provide her investment advice to a charitable organization’s ERISA-governed retirement plan.

The advisor would render advice about (but not decide) investment alternatives for an individual-account plan that provides participant-directed investment.  The advisor would have no authority, discretionary or even non-discretionary, to implement her advice.

The advisor is not registered with the Securities and Exchange Commission or any State’s regulator because she is not, “for compensation, engage[d] in the business of advising others[.]”  Investment Advisers Act of 1940 § 202(a)(11), 15 U.S.C. § 80b–2(a)(11) (emphasis added).

Under ERISA § 3(21)(A)(ii), “a person is a fiduciary with respect to a plan to the extent . . . (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[.]”

The Labor department’s and courts’ interpretations have set up the idea that a commission or other compensation paid or provided, however indirectly, by a third person can be compensation that invokes ERISA § 3(21)(A)(ii).

But this advisor will get no fee, and cannot get a commission or other payment from a third person.  Also, this advisor will get no fee or other compensation for any service beyond investment advice.

How comfortable should I be in advising that the advisor is not the retirement plan’s fiduciary?  Is there any gap or flaw in reasoning that, absent a fee, the advisor is not the plan’s fiduciary?

I recognize that whichever fiduciary decides the retirement plan’s menu of investment alternatives must evaluate, according to ERISA § 404(a)’s duties, whether it is prudent to consider the advisor’s advice.

I’ll appreciate any ideas from BenefitsLink neighbors.

So why is the person doing this? I  presume compensation, tangible or intangible.

11 hours ago, QDROphile said:

So why is the person doing this? I  presume compensation, tangible or intangible.

Sounds like they are trying to make a donation of time and expertise to a charity.

Peter, your cites seem to soundly support the idea that compensation must be received to be a fiduciary.  Having said that, no good deed goes unpunished, so I suppose the weakness in the argument could be that there is intangible comp involved.  Maybe, I dunno.

Is the person getting referrals because of this work? An official thanks and/or recommendation in the organization's newsletter to members, etc? I have no idea if these things might be considered "indirect" compensation -  that's a matter for counsel. It seems like a stretch to me, but the DOL is not noteworthy for being reasonable. And the firms that specialize in going after plans/fiduciaries are pretty creative...

Thank you, QDROphile, Bird, and Belgarath, for your helpful thinking.

While I dislike many lawyers’ use of pro bono to describe the category, many professionals consider a moral responsibility to volunteer one’s service, without fee, to those who would not be a paying client but need the service.  Some investment advisors similarly volunteer uncompensated services.

I had thought about whether an opportunity for referrals, or even good will, might be indirect compensation that invokes ERISA § 3(21)(A)(ii).  First, the circumstances of the charity, its employees, those who serve on its governing board, and its donors are such that it’s unlikely any of them ever would become any advisor’s paying client.  Further, the advisor is unregistered, and so cannot accept a paying client.  (Because she is retired, she will remain unregistered.)  This also makes recognition or good will something that won’t result in compensation.

Thank you for helping me think this through.  You have given me a Christmas present I value much more highly than others.

2 hours ago, Peter Gulia said:

Further, the advisor is unregistered, and so cannot accept a paying client.  (Because she is retired, she will remain unregistered.)  This also makes recognition or good will something that won’t result in compensation.

I think that tips the scales in favor of allowing this.  She's basically not an advisor.

Lots of factors to rebut the presumption.

If I were looking for trouble, I would look at it from the side of the fiduciaries who are receiving the investment advice. Is it prudent to be accepting investment advice from someone with no current credentials and is simply a good-hearted volunteer? How heavily do the fiduciaries plan to rely on the advisor? Do they have enough of their own knowledge to be able to evaluate or even consider the question properly?  Is the advisor going to begin the advice with disclaimers? The conventionality of going in to the market and hiring a professional with credentials who is engaged in the business and also engaged by others provides some automatic protection.

I am not trying to shoot this down, but you are well aware that up-front consideration of these issues provides a lot of protection against later challenges.

QDROphile, thank you for your further thoughts, which again help me.

As mentioned in the originating post, I recognize that whichever fiduciary decides the retirement plan’s menu of investment alternatives must evaluate, according to ERISA § 404(a)’s duties, whether it is prudent to consider the advisor’s advice.

The without-fee advisor doesn’t lack experience or credentials.  Before her recent retirement, she worked over 35 years in retirement investment consulting.  She is a CFA^® (Chartered Financial Analyst) charter-holder.

The charity considered engaging a currently registered investment adviser, but the charity has no budget to pay anything for a retirement plan.  It’s impractical to pay a fee from the plan’s assets, because the plan is a start-up with $0 now.

I considered the named fiduciary’s capability to evaluate the advisor’s advice.  I did so to evaluate whether anyone might assert plausibly that the advisor was, practically, the real decision-maker.  (That finding might make even an uncompensated advisor a fiduciary.)  The three members of the charity’s retirement plan committee have post-secondary degrees (A.B. M.A. / B.S. M.B.A. / A.B. J.D. LL.M.), and all have deep charitable-sector finance experience.  None has investment experience beyond personal investment in mutual funds.  (The charity’s § 403(b) plan will use only mutual funds.)  An assertion that the advisor was the de facto decision-maker is a risk.  In my written advice, I’ll explain this risk, and methods the advisor might use to guard against it.

QDROphile, you are right to caution me not to let enthusiasm for helping a charity’s workers overtake clear-minded thinking about exposures and risks.

Another possible consideration - does the fact that the investment adviser is retired mean that the adviser still keeps up with the current market in the same way as she did before retirement and is therefore still qualified to evaluate investments and give advice? Does she still have access to all the resources she had before to evaluate investments? Generally speaking, it seems to me that an investment adviser needs to be "in it" full-time to give good advice. This is one of the main reasons that the typical plan committee member hires an adviser - because the committee member is not able and doesn't have time to evaluate investments full-time. I think of my uncle, who is a retired financial adviser, who does not even give investment advice to his kids because "if the market goes up, the advice was good" but if the market goes down, the advice was bad and they'll be looking for someone to blame. If he's not getting compensated, he doesn't want to take that risk. 

Agree with all others that this is pretty remote for the fiduciary status-----several different investment advisors could provide their own newsletter for no fee to a plan that is evaluating different mutual funds mentioned----the "for a fee" requirement ties it down pretty well in terms of direct impact---most of us who provide a lot of pro bono work just do it to give back, period. Even if some remunerative intent is given, it still seems too remote to be considered a fiduciary. Great question, Peter. Best wishes for the New Year to everyone.

Peter, I'll assume that all five prongs of the regulations' definition are met, but there is no compensation, direct or indirect. The "rubber hits the road" when something or other "hits the fan." If the plan has a perceived investment loss that is perceived to be attributable to the advice provided by the person who is donating her effort, would a lawsuit by the plan in federal court under ERISA survive a motion for summary judgement? Tough question, but my guess is that the uncompensated adviser would skate for the reason you have explained, although her legal expenses could be significant, and if she has an agreement with the plan that says she works for free, but is indemnified for anything, let alone legal fees, I think that is probably "consideration". But now the plan is in a position where, had it paid for the service instead of accepting it gratis, it would have had recourse against the adviser with respect to the loss sustained by the plan. I agree with QDROphile's suggestion that at this point the plan's named fiduciaries would need to think about their own liability for having entered into a defective service provider agreement.

If this is informal and infrequent advice, I think I would try to get more comfortable with the "primary basis" and "regular basis" prongs of the definition before hanging my hat entirely on the absence of consideration.

EBP, Bob the Swimmer, and Luke Bailey, thank you for your thoughts.

EBP, the adviser keeps up. Although retired from fee-paying work, she volunteers her services to small charitable endowments. To support that work, she maintains subscriptions with Morningstar and other investment-information publishers.

Bob, I like the idea of getting the committee some other (and independent) sources of information.

Although neither the charity nor its retirement plan committee is my client, we recognize that after the retirement plan is launched, attracts elective deferrals, and grows plan assets, the charity’s retirement plan committee should replace the volunteer adviser with a legally responsible adviser. For now, the investment-advice volunteer hopes the committee could (if it ever needs to) defend its decision to accept the volunteer’s investment advice by showing that a fiduciary acting with the care, skill, prudence, and diligence ERISA § 404(a)(1)(B) requires but “under the circumstances then prevailing” would have done no better (because there was no money to pay an adviser).

Luke, thank you for mentioning that an indemnity might be compensation. The volunteer’s engagement letter can disclaim every exculpation, exoneration, and indemnification (including a right to an advance or reimbursement of attorneys’ fees) the plan might provide. (We’ll do it in the letter because we won’t have control of the plan’s governing document.) Likewise, the engagement letter can disclaim every indemnification the charity’s governing documents or Delaware law might provide.

Although a litigator might assert (if the need ever arises) an absence of one or more elements described in 29 C.F.R. § 2510.3-21(c)(1)(ii)(B), I’ll mention these but won’t feature it in my written advice. Among a few reasons: (1) Even if 31 C.F.R. § 10.33 and § 10.37 don’t govern my advice, I won’t ground a conclusion on a fact or assumption I suspect is implausible. (2) I don’t want to bog down my advice with unnecessary details about whether a court would find that (i) the statute is ambiguous, (ii) the 2020 rule reinstated the 1975 rule, (iii) the 1975 rule is a permissible interpretation of the statute, and (iv) a court must or should defer to the agency’s interpretation.

The volunteer adviser does not fear responsibility, and would not fear liability about her own advice.

Rather, she wants to be ready (if the need ever arises) to argue she had no responsibility to “make[] reasonable efforts under the circumstances to remedy [another fiduciary’s] breach” because she never was an ERISA-defined fiduciary. If she cannot get reasonable comfort that her advice does not make her a fiduciary, she might not volunteer.

Just a different thought - maybe away from the basic question asked:

Have this highly experienced and educated person TEACH a class to the group of participants on how to invest for retirement.  

This discussion makes me happy that I am no longer in the absurd ERISA business, although I do advise myself, and my wife, about all of our retirement assets, now ensconced in IRAs. But a couple of observations here.  Investing for retirement (including choosing DC plan investment options for those plans that offer them) is not rocket science, brain surgery or anything even close to that.  i see absolutely no reason why a retired person with expertise should not be able to provide free advice of the kind suggested without difficulty to her.  However, as others have pointed out, the real question is whether those who do act as fiduciaries in choosing the investment options are competent to do so,  and the answer to that is most likely "NO."  But that's almost always the case, is it not?