On September 27, 2022, United States District Court for the Southern District of New York, in Carfora et al. v. Teachers Insurance Annuity Association of America and TIAA-CREF Individual & Institutional Services, found (among other things) that “advice” that defendants gave plaintiffs with respect to rollovers did not make them “advice fiduciaries” under ERISA. Carfora provides a judicial interpretation both of ERISA’s fiduciary definition and of the Department of Labor’s (regulatory) “five-part test” (discussed below) for fiduciary status in the critical context of plan rollovers. And in that regard, the court’s interpretation differs substantively from DOL’s own recent re-interpretation of the five-part test (in the preamble to Prohibited Transaction Exemption 2020-02). As such, the court’s decision is unique and offers a counter-interpretation to DOL’s new rule that may affect ongoing litigation over it.
In this note we focus on the court’s decision as it bears on these issues. We begin, however, with a summary.
The court’s discussion of and decision on “who is an advice fiduciary under ERISA” is complicated by a number of factors, most significantly, the Department of Labor’s ongoing efforts to revise its own rules on that very issue, first in its (failed) effort to put a new fiduciary advice rule in place (the 2016 Fiduciary Rule that was vacated by the Fifth Circuit Court of Appeals in 2018), then in its subsequent incorporation of large pieces of the Fiduciary Rule in its reinterpretation of the 1975 rule’s five-part test in the preamble to PTE 2020-02. Both of those regulatory projects focused (most significantly) on the issue in this case: can a person providing one-time advice with respect to a rollover transaction be treated as satisfying the “providing advice on a regular basis” part of the five-part test?
With regard to that question, in the preamble to PTE 2020-02, DOL stated – as part of its “final interpretation of when … advice would meet the statutory and regulatory definition of fiduciary investment advice“ – that “advice to roll assets out of a Title I Plan into an IRA where the investment advice provider has not previously provided advice but will be regularly giving advice regarding the IRA in the course of a more lengthy financial relationship would be the start of an advice relationship that satisfies the regular basis prong.” To be clear about what DOL said in the PTE preamble: advice after the assets have left a Title I plan for an IRA (and thus have left ERISA and its fiduciary protections) may be counted in determining whether advice with respect to the rollover was part of advice provided on a “regular basis.”
The court in Carfora explicitly rejects this view, finding:
The 2020 guidance [in PTE 2020-02] notes that the analysis under [ERISA’s advice fiduciary language] and the 1975 regulations may take into account the nature of the relationship after assets have been rolled out of the plan and into an IRA. … The Court’s own analysis would not arrive at the same conclusion. The 1975 test was promulgated in reference to [ERISA statutory language], which says that a “person is a fiduciary with respect to a plan to the extent . . . he renders investment advice . . . with respect to any moneys or other property of such plan.” (Emphasis added). Plaintiffs do not offer an explanation as to why assets, having left the plan, are still “moneys or property of such plan” as relevant to the regular basis inquiry, and the Court reads this statutory text as inconsistent with such argument. Instead, plaintiffs simply rely on the 2020 interpretive guidance that states: “[A]dvice to roll assets out of a Title I Plan into an IRA where the investment advice provider has not previously provided advice but will be regularly giving advice regarding the IRA in the course of a more lengthy financial relationship would be the start of an advice relationship that satisfies the regular basis prong.” … Putting aside the fact that the Court need not defer to that interpretation, the Court finds that the better reading of the statute and regulations takes into account only advice given while the assets are, in fact, plan assets when deciding whether TIAA rendered “investment advice” on a “regular basis.”
It’s not entirely clear what the status of this finding by the court is. For this case, it makes up one reason why the court finds that TIAA is not an advice fiduciary and therefore no ERISA fiduciary claim may be brought against it. The practical question is: to what extent will other courts – e.g., the United States District Court for the Northern District of Texas which is considering a challenge to PTE 2020-02 in Federation of Americans For Consumer Choice, Inc. v. Department of Labor – adopt this analysis?
We discuss these issues in more detail below, beginning with some background.
Finally, a word about why all this matters to plan sponsors: DOL’s “reinterpretation” of the five-part test in PTE 2020-02 may in some situations apply to sponsor officials – e.g., an HR official who casually gives an individual participant advice about how to select a target date fund option. And, to the extent it expands the rules applicable to plan service providers/outside fiduciaries, sponsor fiduciaries will have an expanded duty to monitor.
Between 2011-2017, defendants – collectively “TIAA” – undertook an expansion of their individual advisory business through a “Consultative Sales Process.” “The centerpiece of TIAA’s new strategy was to aggressively market Portfolio Advisor, a managed account program,” which placed investors in a model portfolio of securities, and rebalanced assets “if they deviate too far from the model.”
Towards this end, TIAA “Portfolio Advisors” “cold-called participants in TIAA-administered employer-sponsored plans ‘to offer free financial planning services, often describing the service as an included benefit of the plan.’” They then held “discovery” meetings with interested participants in which they sought “to convince the client that he or she needed the high-touch services offered by Portfolio Advisor.” The end-game was to “encourage … Plaintiffs and others similarly situated to take distributions from their defined contribution plans and roll that money over into TIAA’s ‘Portfolio Advisor.’”
Anyone familiar with DOL’s efforts to revise ERISA’s advice fiduciary rule will recognize TIAA’s rollover-targeted sales activity as the sort thing that DOL was most concerned about.
Plaintiffs claim that TIAA was an advice fiduciary
A necessary element of plaintiffs’ claim that TIAA violated ERISA’s fiduciary rules was that TIAA was in fact an ERISA fiduciary. In support of their position plaintiffs argued that TIAA was an “advice fiduciary” under the statute and applicable regulations. The controlling regulation in this regard is DOL’s 1975 regulation setting forth a “five-part test” for who is an advice fiduciary. One of the “five parts” of that test, and the focus of the court’s analysis in Carfora, is a requirement (for fiduciary status) that the advice be provided on a “regular basis.”
Prior to publication of the preamble to PTE 2020-02, the “regular basis” part of the five-part test was interpreted as meaning that an initial sales conversation/contact was not “fiduciary advice.” And, in a 2005 Advisory Opinion (The “Deseret Letter), DOL took the position that ERISA fiduciary rules did not apply to IRA rollovers because, once in the IRA, the relevant assets were no longer ERISA “plan assets.”
In PTE 2020-02, however, DOL (among other things) revoked the Deseret Letter and reinterpreted the “regular basis” element of the five-part test – finding that it could include (as noted above) advice given after a participant’s assets have left an ERISA plan (e.g., have been rolled over into an IRA). Plaintiffs argued that the court should follow DOL in this regard and find that post-rollover TIAA Portfolio Advisor activity with respect to the distributed assets could be part of a finding of “regular basis” advice.
The court’s decision
The first issue for the court with respect to this claim was the status of what it called DOL’s “evolving guidance” – the weight that should be given the 1975 regulation, the Deseret Letter and its subsequent revocation, and DOL’s 2020 reinterpretation of the five-part test. A necessary element of this analysis was that, at the time plaintiffs claim TIAA was an advice fiduciary, the Deseret Letter was still “in effect”/had not been revoked and the five-part test had not been reinterpreted.
In this regard, the court found generally that such a retroactive application of an “agency interpretation [that] conflicts with a prior interpretation” is inappropriate. Instead, the court undertook to “engage in its own interpretation of ERISA’s statutory provisions and the regulations promulgated thereunder, … as well as interpretations from other courts that have considered the relevant statutory and regulatory language and DOL guidance over the years – to determine whether TIAA was an investment advice fiduciary during the relevant time period.”
To be clear: the Carfora court decided to offer its own, judicial interpretation of what the statute and the (regulatory) five-part test mean by “advice fiduciary.” And the court’s interpretation was (emphatically) different from DOL’s: The court found that the statute and the “regular basis” element of the five-part test do not apply to or take into account post-rollover activity and therefore post-rollover activity cannot support a finding of advice on a “regular basis.” To repeat part of the lengthy quote we included in the summary:
Putting aside the fact that the Court need not defer to [DOL’s] interpretation [in the preamble to the PTE], the Court finds that the better reading of the statute and regulations takes into account only advice given while the assets are, in fact, plan assets when deciding whether TIAA rendered “investment advice” on a “regular basis.”
Without consideration of post-rollover “advice” to “bolster” a regular basis finding, “TIAA’s limited recommendations to Plaintiffs to engage in a one-time transaction [does not constitute] advice on a ‘regular basis’ under ‘the language of the statute and regulation which have been in effect since 1975[.]’”
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One way to read the court’s decision, in this case, is as a repudiation of one of the more controversial positions that DOL took in PTE 2020-02 – that post-rollover advice could support a finding of “advice on a regular basis.” But as we said at the top, it’s not entirely clear what the status of this court’s decision is. As we noted, the court found it did not need to consider deference to DOL’s reinterpretation of ERISA’s advice fiduciary definition in PTE 2020-02 because plaintiffs’ claims related to a period prior the issuance of the PTE. We do not know what the court would have said if the PTE had applied to the period under consideration.
As a practical matter, the significance of this decision will depend on whether other courts follow its logic.
We will continue to follow this issue.