A central provision of the Department of Labor’s new conflict-of-interest proposal would replace how the Employee Retirement Income Security Act defines “fiduciary” for plan advisors with stricter language.

Shortly after the landmark 1975 law passed, regulators created a five-part test to determine whether the advice of an outside plan consultant constitutes fiduciary services.

That test is now outdated, according to the DOL’s proposal, and in need of updating to better reflect ERISA’s original purpose, and better protect “plans, participants, beneficiaries and IRA owners from conflicts of interest, imprudence and disloyalty.”

Moreover, the five-part test was created “in a very different context, prior to the existence of participant-directed 401(k) plans.”

Because of loopholes in the language, many advisors have “no obligation to adhere to ERISA’s fiduciary standards or to the prohibited transaction rules,” the proposal states.

ERISA considers anyone giving advice to a plan as a fiduciary. The five-part test serves to define what advice is, and consequently, whether the person giving it is a fiduciary.

They are fiduciaries if their advice meets the following stipulations: the person giving it is recommending securities or investments, doing so on a “regular basis,” pursuant to a mutual agreement with a plan’s sponsors and fiduciaries, with an understanding the advice serves as a primary basis for investment decisions, and that the advice is given the a specific plan’s needs.

If the nature of the advice doesn’t meet those five conditions, then the one providing it is not a fiduciary.

That’s a problem for the DOL. The agency’s proposed new rule says the test could “undermine, rather than promote,” ERISA’s original purpose—to guarantee plan participants’ fiduciary protections.

That’s because it allows “many advisers to avoid fiduciary status and disregard ERISA’s fiduciary obligations of care,” according to the DOL.

Specifically, the second of the five-part test—that the advice be furnished on a “regular basis”—creates openings for consultants to give advice that might have massive consequences to plans and participants, and do so on a non-fiduciary basis, only because the advice was provided once, not regularly.

The DOL cites the one-time purchase of a group annuity, when a sponsor of a defined benefit plans seeks to de-risk pension liabilities, as an example of how fiduciary standards can be sidestepped. Or instances when an adviser is hired to consult on a one-time acquisition, such as in the case of a real estate investment.

“Despite the clear importance of the decisions and the clear reliance on paid advisers, the advisers would not be plan fiduciaries” under the existing five-part test, the DOL writes.

The “regular basis” requirement is equally consequential on individual 401(k) rollovers, or the one-time decision to purchase an annuity with defined contribution assets, according to the DOL’s defense of its proposal.

Other loopholes in the five-part fiduciary test come from the third requirement, which insists advisors act in a “mutual” agreement with sponsors.

Investment professionals “frequently” disclaim they mutually agree their advice will be used to make actual decisions on in the fine print of agreements, according to the DOL.

The DOL’s proposal implies broker-dealers often make such disclaimers.

“There appears to be a widespread belief among broker-dealers that they are not fiduciaries with respect to plans or IRAs because they do not hold themselves out as registered investment advisers, even though they often market their services as financial or retirement planners,” said the DOL.

Those disclaimers, and the distinction between fiduciary and non-fiduciary advice, are often lost on participants, claims the proposal.

The new proposal “broadly updates” the definition of fiduciary, while allowing for carve-outs that say certain communication and investor education efforts not qualify those offering them as fiduciaries.

Anyone giving investment recommendations, investment management recommendations, appraisals of investment, or anyone recommending another advisor or asset manager would all qualify as fiduciaries.

If the DOL’s proposal were to pass as is, it would very likely have significant ramifications on the annuity and IRA markets, and reign in the latitude non-fiduciary brokers have assumed in advising plans and participants.

IRA rollovers will total more than $2 trillion over the next five years, the DOL notes.

That’s a trend that was far from apparent when the five-step fiduciary test was created in 1995.

And enough to justify the DOL’s effort, through a public process, to revise how fiduciaries are defined, said the proposal.