James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA®

As a fiduciary risk management counsel, I read the DOL’s recent Advisory Opinion 2025-04A (Opinion) with great interest. As I read the opinion, I kept remembering my father’s advice – “The good Lord gave you a brain for a reason. Use it! Don’t be stupid.” In other words, always strive to make well-reasoned decisions.

Along those same lines, one of my main messages to our clients is to avoid unnecessary fiduciary risk exposure. To that end, InvestSense recommends that plan sponsors always use a simple two question analysis as a first step in evaluating potential investment options for their plan.

1. Does ERISA require a plan to offer the investment product or strategy in a plan? Hint: ERISA does not specifically require that any specific investment product or strategy be offered within a plan, only that each product offered within a plan be legally prudent.

2. If the product or strategy is not legally required to be offered within a plan, would/could offering the product or strategy expose the plan to unnecessary fiduciary risk? If so, why go there? Don’t go there! Don’t be stupid! Smart people do not valuntarily assume unnecessary risk. Thus, our directive for fiduciaries to Keep It Simple & Smart, or KISS.

Upon reading the Opinion, one particular sentence immediately stood out to me:

For participants who do not make a [SIP] allocation selection, the plan sponsor selects a default allocation percentage.” SIP refes to the annuity component in the investment at issue in the Opinion. Selecting investments for a plan is one thing. Any language calling for plan sponsors to become actively involving in making allocation decisions is a definite red flag, especially when the product itself is suspect as to fiduciary prudence.

While the Opinion seems to indicate that a plan participant can subsequently revise the percentage chosen by a plan sponsor, the complexity of the product itself and the likelihood of confusion of a plan participant raises numerous fiduciary litigation red flags as to potential litigation . The product fails the two question test.

With no legal obligation to offer the product, the prudent choice for a plan sponsor is not to do so at all, as plan participants interested in said product can do so outside of the plan, without exposing the plan to unnecessary and unwanted fiduciary liability.

Another reason for my position is the inconsistency between the standards set out in NAIC Rule 275 and ERISA 404(a). As I discussed the in an earlier post.¹ The inconsistency clearly allows for the possibility that a broker’s recommendation may be compliant with Rule 275, while non-compliant with ERISA 404(a). As a result, the broker’s recommendation may actually result in a fiduciary breach by, and resulting liability for, the plan sponsor.

In managing fiduciary risk, InvestSense stresses the importance of two court decisions, one in connection with actively managed mutual funds, the other in connection with annuities. Both decisions are widely cited by courts across the country, The annuity case is Gregg v. International Transportation Workers of America, in which the court explained the need for pension plans to proceed in caution when considering recommendations involving annuity brokers:

Insurance brokers [like FPA] do not work for a pension plan; rather, insurance companies like Transamerica pay individual insurance broker a salary. As a broker, FPA and its employees have an incentive to close deals, not to investigate which of several policies might serve the union best. A business in FPA’s position must consider both what plan it can convince the union to accept and the size of the potential commission associated with each alternative. FPA is not an objective analyst any more than the same real estate broker can simultaneously protect the interests of both buyer and seller or the same attorney can represent both husband and wife in a divorce.”²

Because of the obvious conflict of interest issues created whenever commissions are involved, I would suggest that all investment fiduciaries heed the Gregg court’s warning. For investment fiduciaries, it is always best to avoid even the appearance of impropriety. As Judge Cardozo pointed out in the legendary fiduciary decision of Meinhard v. Salmon:

Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions). Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.³ (citation omitted)

In other words, avoid even the appearance of impropriety.

This DOL Opinion has no impact on anyone other than the parties involved and does not compel any action on the part of other plan sponsors. As a result of the issues identified herein, we have advised our clients to ignore both this Opinon and the product involved.

Why go there? Don’t go there! Don’t be stupid!

Notes
1. https://fiduciaryinvestsense.com/2025/09/15/erisa-404a-vs-naic-rule-275-wake-up-call-or-ticking-fiduciary-litigation-liability-time-bomb-for-plan-sponsors/
2. Gregg v. Transportation Workers of Am. Intern, 343 F.3d 833, 841 (6th Cir. 2003).
3. Meinhard v. Salmon, 249 N.Y. 458, 464 (1928).

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This article is for informational purposes only and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.