On Tuesday afternoon, the Department of Labor (DOL) released its final Retirement Security Rule—also called the Fiduciary Rule—that it said will “protect the millions of workers who are saving for retirement diligently and rely on advice from trusted professionals on how to invest their savings.”
This final rule updates the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC).
The DOL anticipates that the most significant benefits of the final rule and amended prohibited transaction exemptions (PTEs) will stem from the application of ERISA’s fiduciary protections under Title I and Title II and PTE conditions to all covered investment advice provided to retirement investors.
Under the final rule, a person is an investment advice fiduciary if they provide a recommendation in one of the following contexts:
- The person either directly or indirectly (e.g., through or together with any affiliate) makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation:
- is based on review of the retirement investor’s particular needs or individual circumstances,
- reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and
- may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest; or
- The person represents or acknowledges that they are acting as a fiduciary under Title I of ERISA, Title II of ERISA, or both with respect to the recommendation. The recommendation also must be provided “for a fee or other compensation, direct or indirect” as defined in the final rule.
One-Time Advice
Importantly, the regulation closes the loophole for "one-time advice."
"This nearly 50-year-old rule has not kept up with these important changes in the marketplace," an accompanying fact sheet said. "For example, under the 1975 rule, a financial services provider was an investment advice fiduciary only if the advice was provided on a 'regular basis' with respect to plan assets and there was 'a mutual agreement, arrangement, or understanding' that the advice would serve as 'a primary basis for investment decisions.'"
As a result, advice that was provided on a "one-time" basis, like many recommendations to roll retirement savings out of a workplace retirement plan and into an IRA, was typically not treated as fiduciary advice and therefore was not protected by ERISA's fiduciary safeguards. Yet, as the rule states, one-time advice is often the most important advice the retirement investor will ever receive.
"The new rule and exemptions close the loopholes that defeat legitimate investor expectations by holding trusted advisers to a fiduciary standard. When an individualized recommendation comes from an investment professional holding themselves out as someone who is acting in the investor's best interest, it is only right that the advice meet a fiduciary standard."
The updated definition will take effect on Sept. 23, 2024, and applies when financial services providers give compensated investment advice to retirement plan participants, individual retirement account owners and plan officials responsible for administering plans and managing their assets.
“America’s workers and their families rely on investment professionals for guidance as they save for retirement,” Acting Secretary Julie Su said in a statement. “This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions.”
Leveling the Playing Field
The rule also ensures investment professionals can compete for business on what the DOL called a “level playing field,” instead of being hindered by a skewed system in which different standards exist for advice providers based on the products they recommend.
The department noted that the current definition of investment advice fiduciary, adopted in 1975, was written when individual retirement accounts were less common and before 401(k) plans existed. Most people relied on traditional pensions for retirement security.
Today, individual plan participants and IRA owners, not professional money managers, are expected to make important, complex financial decisions, and they seek help from expert advisers, which made updating this rule necessary.
“These new rules update regulations created nearly a half-century ago that simply are not providing the protections America’s workers need and deserve for their retirement savings so that they can retire with dignity,” Assistant Secretary for Employee Benefits Security (EBSA) Lisa M. Gomez added. “The investment landscape has changed, the retirement landscape has changed, and it is critical that our regulations are responsive to those changes so that workers can reach the secure retirement that they work for decades to finally achieve.”
The department also amended related existing administrative PTEs that are available to investment advice fiduciaries. The amendments make the exemption conditions more "uniform and protective."
Under ERISA and the Code, investment advice fiduciaries must avoid conflicts of interest or comply with an exemption’s conditions to receive compensation that otherwise would be prohibited. The amended exemptions require investment advice fiduciaries to provide retirement investors with advice that is prudent, loyal, honest, and free from overcharges.
Additionally, both amended PTE 2020-02 and amended PTE 84-24 include a one-year transition period after their effective dates under which parties have to comply only with the Impartial Conduct Standards and provide a written acknowledgment of fiduciary status for relief under these PTEs.
The DOL further notes that the amended PTEs’ compliance obligations are generally consistent with the best interest obligations set forth in the Securities and Exchange Commission’s (SEC) Regulation Best Interest and its Commission Interpretation Regarding Standard of Conduct for Investment Advisers (SEC Investment Adviser Interpretation), each released in 2019.
Changes and Clarifications
According to the preamble, the DOL has made certain changes and clarifications in response to public comments on the proposal and the testimony presented at the public hearings.
The final rule narrows the contexts in which a covered recommendation will constitute ERISA fiduciary investment advice and makes clear that the test for fiduciary status is objective, the preamble notes. Similarly, a new paragraph in the regulatory text confirms that sales recommendations that do not satisfy the objective test will not be treated as fiduciary advice, and that the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of the rule.
Additionally, the final rule makes clear that the rule is focused on communications with persons with authority over plan investment decisions (including selecting investment options for participant-directed plans), rather than communications with financial services providers who do not have such authority.
Accordingly, the rule excludes plan and IRA investment advice fiduciaries from the definition of a retirement investor. As a result, an asset manager does not render fiduciary advice simply by making recommendations to a financial professional or firm that, in turn, will render advice to retirement investors in a fiduciary capacity. The DOL says that it believes the final rule, with these revisions, appropriately defines an investment advice fiduciary to comport with reasonable investor expectations of trust and confidence.
The Federal Register will publish the final rule and amended prohibited transaction exemptions on April 25, 2024.
Links to the final rule, related PTE amendments and a fact sheet are below.
Amendment to PTEs 75-1, 77-4, 80-83, 83-1, and 86-128
Fact Sheet: Retirement Security Rule and Amendments to Class Prohibited Transaction Exemptions
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