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Be Wary When Giving Investment Advice to Clients

Jamie P. Hopkins shares some tips on how estate planners can avoid running afoul of the DOL’s new rule.

In April 2016, the Department of Labor (DOL) finalized its long-awaited conflict of interest rule and related prohibited transaction exemptions, expanding the definition of fiduciary “investment advice” under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code.1 While the new rules were primarily developed in an attempt to further regulate the advice provided by professionals in the financial services industry with respect to individual retirement accounts, the newly expanded definition of “investment advice” will inevitably cover advice commonly provided by estate planners. As a result, estate-planning attorneys, who already owe their clients a high standard of care and a duty of loyalty under most state laws, could be subject to more stringent fiduciary requirements under federal law, creating new liability concerns. 

Some uncertainty regarding the new rule remains because compliance with the rule isn’t slated to begin until April 2017. The new Trump administration and Congress could take a much different position on the rule and even try to undo it. However, undoing the rule isn’t that simple, as it was published in the Federal Register on April 8, 2016 and became effective in June 2016. Back in 2009, the Obama administration successfully derailed a DOL Bush-era investment advice rule before it had taken effect, so a reversal isn’t out of the question. Although it’s possible that the new administration and Congress could manage to overturn the current rule, there’s a strong likelihood that the rule will survive, since it’s already in effect. 

An attorney should be wary of providing advice under this new rule, as it can create fiduciary responsibilities for a retirement plan or IRA. These fiduciary responsibilities require special duties to clients, establish potential co-fiduciary liability, presumably increase liability insurance costs and possibly expose the attorney to additional malpractice lawsuits. The new rule teeters precariously on the edge of advice that attorneys customarily provide to clients. Given the rule’s potentially broad spectrum, attorneys need to understand the boundaries of the expanded rule and act in accordance. 

The 5-Part 1975 Definition 

Traditionally, estate-planning attorneys weren’t likely to be considered fiduciaries under ERISA. While ERISA describes three ways in which a person might be considered a “fiduciary,” this article focuses on just one of those ways—that is, providing investment advice. Under ERISA, a person is considered a fiduciary if 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[.]”2 ERISA’s provisions cover advice to those employer-sponsored employee-benefit plans, like 401(k)s, and to defined-benefit plans. Additionally, the IRC, which covers the provisions and rules pertaining to IRAs and individual retirement annuities, contains a similar clause regarding the definition of a fiduciary that states that “any person who . . . 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” is considered a fiduciary.3

Accordingly, for an estate-planning attorney to be held to the legal requirements of ERISA’s fiduciary standards with respect to his advice regarding an IRA or 401(k) plan, the advice must qualify as investment advice. In 1975, the DOL issued a definition of “investment advice” under ERISA Section 3(21), which included a 5-part test.4 The original, narrowly construed definition of “investment advice” required that the person: (1) 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, (2) on a regular basis, (3) pursuant to a mutual understanding, (4) that the advice will serve as a primary basis for investment decisions with respect to plan assets, and (5) that the advice will be individualized to the particular needs of the plan regarding investment decisions.5 Under the 1975 definition of investment advice, estate-planning recommendations were unlikely to trigger the ERISA fiduciary standard, as estate-planning advice typically wasn’t related to the investing, purchasing or selling of securities or other property, nor was it delivered on a regular basis to the client. 

Newly Expanded Definition 

In an attempt to further regulate rollovers and remove some perceived abuses, the DOL decided to expand the definition of investment advice for both ERISA and the IRC. Additionally, the DOL revamped a number of prohibited transaction exemptions. What might surprise some people is that the DOL is authorized to redefine non-ERISA tax provisions relating to the standard of care required when providing advice to IRAs. When Congress created ERISA, it granted authority to interpret ERISA’s provisions to a variety of government agencies, including the DOL and the Treasury Department. Originally, the DOL was granted the ability to interpret ERISA’s non-tax law provisions, including the fiduciary responsibility provisions of employer-sponsored retirement plans. The Treasury Department was granted the authority to interpret the Tax Code provisions that apply to IRAs. However, in 1978, the DOL and Treasury Department agreed to transfer to the DOL the authority to make rules and interpret tax statutes in the IRC regarding prohibited transactions and exemptions. This action was taken in an attempt to ensure consistent rulemaking across the board.6

While estate planners generally fell outside the scope of ERISA’s fiduciary requirements under the 1975 “investment advice” definition, the new 2016 definition is far more expansive. The DOL acknowledged the concern that the legal services provided by an attorney could now cause that attorney to be considered an investment advice fiduciary by stating that “in the Department’s view, the provisions in the final rule defining investment advice make it clear that attorneys, accountants, and actuaries would not be treated as investment advice fiduciaries merely because they provide such professional assistance in connection with a particular investment transaction.”7 However, the DOL went further to state that, “when these professionals act outside their normal roles and recommend specific investments in connection with particular investment transactions, or otherwise engage in the provision of fiduciary investment advice as defined under the final rule, . . . they [would] be subject to the fiduciary definition.”8

Avoid Triggering Responsibility

When might an attorney act outside of his typical role and engage in another provision of the new definition of fiduciary investment advice? The new definition of investment advice has been expanded to include “recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made[.]”9 The importance of this additional language can’t be understated. Recommendations to engage in rollovers, transfers or distributions weren’t considered investment advice until now. This new definition marks the first time under ERISA that a recommendation not related to a specific investment can be considered investment advice. This means that merely recommending where the investment be held or how it be distributed could trigger fiduciary responsibility. Additionally, the requirement that the advice be on “a regular basis” was removed, meaning that an estate-planning advisor may be subject to ERISA’s fiduciary requirements based on a one-time communication. So, under the new definition, it’s reasonable that an estate-planning attorney, who provides advice to an executor of an estate to sell assets in an IRA or 401(k) or advises the executor to distribute the assets in kind, even though the advice is only provided once, could trigger the ERISA fiduciary standard.

While it’s clear that a recommendation involving the rollover or transfer of an IRA or 401(k) is investment advice, the nature and scope of a distribution recommendation still remains unsettled. While certain recommendations, like assisting a client with his required minimum distributions (RMDs), are clearly distribution recommendations, other areas of advice are less clear. For example, does a recommendation regarding a beneficiary designation equate to a distribution recommendation? Even if helping a client with beneficiary designations isn’t a distribution recommendation, is it still investment advice as it relates to “the form or destination of a rollover, transfer, or distribution”? Determining whether a beneficiary recommendation is investment advice is crucial to attorneys because assisting clients with selecting the proper beneficiaries is central to providing quality estate planning advice.

Explanation of tax or legal consequences. What’s clear from the rule is that an attorney doesn’t render investment advice if he merely limits the advice to explaining the tax or legal consequences of a transaction or document. This means that attorneys need to be careful, clear and concise with their language and advice. There’s a big difference between simply telling a client that “you should do a rollover from your 401(k) into an IRA” and professionally stating that “a distribution from a decedent’s employment-based retirement plan, such as a 401(k), with a direct rollover into an IRA for a surviving spouse, who is the sole beneficiary, would remove the retirement savings from the deceased spouse’s retirement plan and place it into an IRA for the surviving spouse.” Attorneys must pay special attention to their language and steer clear of recommendations regarding retirement accounts to avoid providing investment advice as newly defined. 

Retirement distributions. Based on a plain reading of the new definition of investment advice, providing a recommendation about how an IRA or 401(k) should be distributed once a client passes away by recommending the appropriate beneficiaries and contingent beneficiaries could be considered a distribution recommendation or, at a minimum, advice about where the account should be transferred on the owner’s death. If an attorney goes one step further by providing advice as to the percentage that each IRA or 401(k) beneficiary should receive to provide maximum tax efficiency or other estate benefits, it seems that this advice would qualify as investment advice under the new definition. However, it’s possible that simply helping a client choose the right beneficiary isn’t enough of a recommendation to be deemed investment advice. These examples show that the parameters of the new definition—at least as it pertains to certain types of recommendations—haven’t yet been clearly established. Given the present uncertainty as to the rule’s precise parameters, it’s important that estate-planning attorneys be especially vigilant and familiarize themselves with all potential responsibilities, obligations and liabilities when counseling clients with regard to IRAs and qualified retirement plans. 

RMDs. There are other areas of estate-planning advice that fall more squarely into the new definition of investment advice. For instance, recommendations to a client about his RMDs would be reasonably construed as investment advice. The attorney could state the tax consequences for failing to take an RMD, which is proper professional tax advice, without providing investment advice. However, if the attorney goes so far as to recommend a specific IRA for the client’s RMD, he’s likely provided investment advice under the rule. Additionally, estate-planning attorneys are often tasked with assisting clients with RMD planning in the event of an IRA or 401(k) inheritance. In this case, the client might even be seeking advice as to how much, when, and in what form he should take RMDs. Under the new definition, failure to advise a client about the tax benefits and legal ramifications of RMDs could subject the attorney to liability.

Conversion to Roth IRA. Another common estate-planning recommendation involves the conversion of a 401(k) or traditional IRA to a Roth IRA. Converting an IRA to a Roth IRA can often help reduce state death taxes and federal estate taxes by substantially lowering the value of the taxable estate by removing the income tax paid on the conversion. Additionally, a Roth conversion of a traditional IRA can be a tax-efficient way to leave money to heirs if the taxes are paid from a source outside the IRA. This allows the decedent to provide his heirs with more flexibility while simultaneously avoiding income tax issues. However, recommendations regarding Roth conversions would involve a rollover because the money from the IRA is rolled over or transferred to the Roth IRA as part of the conversion. Consequently, this recommendation would also be subject to the new definition of investment advice.

Medicaid spending. Another scenario in which the attorney’s recommendation could be deemed investment advice is when the attorney is providing Medicaid spend down recommendations. For instance, if the attorney recommends that the client liquidate his IRA or 401(k) in anticipation of spending down assets to qualify for Medicaid, this liquidation or distribution advice would likely be considered investment advice. Yet, an attorney could advise a client about the consequences of taking IRA or 401(k) plan distributions on Medicaid eligibility without providing investment advice. For example, under the new definition, making a recommendation to sell certain assets to qualify for Medicaid could subject the estate-planning attorney to potential liability. Therefore, it may not be prudent investment advice to recommend selling all of an IRA’s or 401(k)’s assets at one time resulting in a large tax bill during a high income tax bracket year, despite being appropriate in the Medicaid spend down context. In short, any attorney recommending the sale or disposition of an IRA or 401(k) account should tread lightly.

Traditional estate-planning advice. While the scope of the new definition isn’t yet thoroughly understood, traditional estate-planning advice touches on a number of distribution aspects of IRAs and 401(k)s, which could subject an attorney to the ERISA fiduciary standard of care. The reality of the situation is that, in some cases, an attorney might need to provide “investment advice” to properly address all of a client’s assets, risks and tax issues, protect the tax-advantaged growth of the accounts and create efficient transfers.

As an investment advice fiduciary, the attorney must adhere to a number of requirements, including adhering to the duties of loyalty, prudence, obedience and communication.10 The fiduciary must also make and keep records, avoid self-dealing situations and take action when another fiduciary acts improperly. In the end, the fiduciary must act in the best interest of the client, a duty already imposed on the attorney under state law.11

What’s Changed?

Because the attorney-client relationship is already a fiduciary relationship, many of the affirmative duties imposed on an investment advice fiduciary, such as the duty to act in the client’s best interest, avoid conflicts of interest and be loyal to the client, are likely already required of the estate-planning attorney. However, there are some duties and liability concerns for an investment advice fiduciary that might not be present for all estate-planning attorneys. For instance, co-fiduciary liability under ERISA could be a concern for some. Under ERISA, a fiduciary is liable for a breach of fiduciary responsibility of another fiduciary, at least concerning the same plan:

1. if the fiduciary participates knowingly in, or knowingly undertakes to conceal, an act or omission of another fiduciary, knowing such act or omission is a breach;

2. if the fiduciary enables another fiduciary to commit a breach; or

3. if the fiduciary has knowledge of a breach by another fiduciary, unless the observing fiduciary makes reasonable efforts to remedy the breach.12

If an estate-planning attorney is a fiduciary to a retirement plan, he can be liable for failing to remedy the misdeeds of an employer, bank, investment-related business or some other fiduciary. It’s hard enough to be a conscientious attorney without taking on responsibility for what others do wrong. This means that if an estate-planning attorney is reviewing a client’s IRA and/or 401(k) and notices a mistake by the client’s financial advisor or another fiduciary, the attorney could be personally liable to the client if he doesn’t make reasonable efforts to fix the mistake and inform the client about it.

Additionally, the statute of limitations under ERISA could extend the liability of a fiduciary violation. A breach of fiduciary duty under ERISA can’t be commenced after the earlier of: “(1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation, or (2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation[.]”13 Additionally, in egregious situations, ERISA does provide for criminal penalties, including jail time and fines.14

Another area requiring an attorney’s attention is with regard to his malpractice insurance. If the estate-planning attorney provides investment advice that isn’t prudent or somehow violates his fiduciary standard of care, it’s possible that this violation, even if it constitutes mere negligence (as opposed to a willful act), could be outside the scope of the attorney’s liability insurance, as the advice was deemed investment advice. At a minimum, it would require the attorney to review his malpractice insurance policy to ensure that the coverage scope and amounts are sufficient to cover any fiduciary investment advice issues that could arise.

In some cases, the attorney may have no choice but to cross the line into providing investment advice and become subject to ERISA’s fiduciary requirements. For most attorneys, avoiding the rule requires that the attorney stay within his legal field of expertise and not cross the line into investment advice. In doing so, the attorney must be aware of the potential pitfalls created by the new rule and provide prudent advice while avoiding conflicts of interest. Because most attorneys work on an hourly or flat-fee basis, most of the issues surrounding conflicted compensation under the rules don’t apply. One solution for attorneys to avoid providing investment advice can be to try to avoid making recommendations on covered topics. Instead, the attorney might provide options and information to enable the client to make informed decisions. For example, the attorney can avoid making comments that could be construed as a recommendation, such as “you should convert that IRA,” and instead say “these will be the benefits and tax consequences of converting that IRA.” 

The New World Order Under ERISA

Real questions have been raised as to the scope and extent that traditional estate-planning advice will be subjected to the ERISA fiduciary standard under the new definition of investment advice. It also raises concerns for attorneys about co-fiduciary liability situations, the type of advice the attorney should provide with regard to retirement plans and IRAs and the scope of an attorney’s professional liability insurance coverage. Moving forward, it will be important for attorneys to monitor the development of the rule and any further guidance that’s provided as to the meaning of investment advice. It’s also important to make inquiries with any malpractice insurance to ensure that one is covered for breach of an ERISA fiduciary claim in the event of a failure to provide prudent investment advice.              


1. While the Department of Labor published seven different documents on this topic in the Federal Register in April 2016, this Trusts & Estates article focuses on only one of them, “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule—Retirement Investment Advice,” 81 Fed. Reg. 20946-21002 (April 8, 2016). The other six documents all refer to prohibited transaction exemptions. 

2. Employee Retirement Income Security Act of 1974 (ERISA) Section 3(21)(A)(ii), 29 U.S.C. Section 1002(21)(A)(ii).

3. Internal Revenue Code of 1986, 26 U.S.C. Section 4975(e)(3)(B).

4. 29 C.F.R. Section 2510.3–21 (1975),

5. See supra note 4.

6. Reorganization Plan No. 4 of 1978 (Aug. 10, 1978), 43 Fed. Reg. 47713 (Oct. 17, 1978), 92 Stat. 3790 (1978). See also 5 U.S.C. App. 237.

7. See supra note 1.

8. See supra note 7.

9. 29 CFR 2510.3-21(a)(1)(ii) (2016).

10. ERISA Section 404, 29 U.S.C. Section 1104.

11. Maritrans G.P., Inc. v. Pepper, Hamilton & Scheetz, 602 A.2d 1277, 1283 (Pa. 1990).

12. ERISA Section 405, 29 U.S.C. Section 1105.

13. ERISA Section 413, 29 U.S.C. Section 1113.

14. ERISA Section 501, 29 U.S.C. Section 1132. See also Sarbanes–Oxley Act of 2002, Pub. L. No. 107–204, 116 Stat. 745 (2002).


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