Proposed Labor Dept Rule Could Hurt ESOPs

The U.S. Labor Department has issued a proposed regulation that would expand the definition of “investment advice” fiduciary under the Employee Retirement Income Security Act (ERISA) to include potentially a wide array of retirement plan consultants, advisors and others providing services to retirement plans or their participants.

The proposed rule also extends fiduciary liability to the Employee Stock Ownership Plan (ESOP) valuation firms and significantly strengthens the Labor Department’s ability to file lawsuits against them for faulty appraisals.

“This (proposed) regulation helps us more fairly allocate the responsibility and hold accountable the person who really is the responsible party if a fiduciary breach occurs,” said Assistant Secretary of Labor for the Employee Benefits Security Administration Phyllis Borzi, in a conference call to reporters. “We want fiduciaries to have good, solid, quality advice that’s consistent with the duties of prudence and loyalty.”

But the proposed rule, as it relates to ESOPs, may do more harm than good, said Michael Keeling, president of the Washington, D.C.-based ESOP Association, according to Workforce Management Online.

Keeling and other ESOP experts believe if approved, the Labor Department rule will reduce the number of firms willing to perform the service. Keeling said the risk to the firm will be too high and firms can turn to other lines of business, such as estate valuation, which don’t require any fiduciary responsibility.

One manufacturer quoted in the Workforce Management article said, “As a 100 percent employee-owned company, the more the company spends, the less it is worth. The more we spend on administering benefits the less we spend on other things like payroll and benefits.”

The Labor Department will take comments on the proposed regulation until January 20, 2011. ◆