As anticipated, the Department of Labor (DOL) has released a proposed rule defining who is an investment advice fiduciary for purposes of the Employee Retirement Income Security Act (ERISA).
The proposed rule, announced during a White House ceremony attended by President Biden on Tuesday afternoon, notably includes a requirement that 401(k) plan-level protection extend to small business owners and participants, something for which the American Retirement Association strongly advocated.
“The ARA supports DOL’s proposed retirement security regulation because it will close a regulatory gap that could leave small business owners establishing a retirement plan for their employees without any investor protections,” ARA CEO Brian Graff said. “The proposed rule will ensure that advice with respect to investments in small business retirement plans will always be subject to ERISA’s fiduciary standards.”
The SEC’s Regulation Best Interest (Reg BI) currently does not extend to recommendations to plan sponsors. While larger plan sponsors generally have access to the expertise and support of professional retirement plan advisors, an advisor who sells a small employer a 401(k) and has no further action (on-time interaction) with the plan or its participants is not, until this point, required to provide investment advice protection under ERISA’s five-part test.
With the provisions of the SECURE 2.0 Act of 2022 expected to significantly expand the number of new plans, particularly those offered by small businesses, this “gap” could have left millions of employers and their workers at risk. The gap in regulatory coverage would close under the proposed rule.
Arguing for improvements over the existing regulation, the DOL again specifically referred to smaller 401(k) plans and participants, noting that the 1975 rule defining a fiduciary doesn’t meet today’s retirement investors’ needs or expectations.
“Under the nearly 50-year-old rule, a financial services provider is an investment advice fiduciary only if, among other things, the advice is provided on a ‘regular basis’ and there is a ’a mutual agreement, arrangement, or understanding’ that the advice will serve as ’a primary basis for investment decisions,’” it said.
Yet one-time advice, such as a single interaction involving a retirement plan sale, is often among the most important advice a retirement investor will ever receive, something the proposed rule acknowledges.
The nearly 500-page proposed rule will have a 60-day public comment period.
Other regulatory developments within the proposed rule and proposed amendments to the Prohibited Transaction Exemptions (PTE) are found HERE.
