In April 2024, the U.S. Department of Labor (DOL) finalized the highly anticipated “fiduciary rule.” The final rule, dubbed the Retirement Security Rule, provides an updated definition of an “investment advice fiduciary.”
Background of the Final Fiduciary Rule
In October 2023, the DOL released a proposal of the rule, which received significant public commentary. The DOL’s objective is to update the current fiduciary rule adopted in 1975 when, as noted by the department, 401(k) plans did not exist, and individual retirement accounts (IRAs) were not commonly utilized.
Under the new rule, those who meet any of the following requirements would qualify as an investment advice fiduciary:
- The person either directly or indirectly 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 a 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
- 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.
In a bid to maintain consistency with other applicable regulations, in the preamble the DOL indicated that the definition of “recommendation” is consistent with how the U.S. Securities and Exchange Commission interprets that term in Reg BI.
The final rule dropped language in the October 2023 proposal that qualified discretionary authority as an automatic fiduciary trigger.
The provision of advice is fundamentally conflicted, according to ERISA—offering advice for a fee triggers fiduciary status, and fiduciaries are prohibited from acting in their own interest (e.g., charging a fee or earning compensation). In order to permit investment advice, the DOL offers guidelines that allow advice providers to manage the conflict by offering various disclosure requirements, adhering to impartial conduct standards, which are substantially identical to ERISA’s duties of care and loyalty, and charging no more than reasonable compensation. The updated regulations offer two prohibited transaction exemptions (PTEs), instead of the historical seven PTEs.
Notably, the new rule would also extend ERISA’s fiduciary requirements to one-time advice, including rollovers to IRAs and annuity purchases.
The DOL further confirmed that the human resources department and other employees of the plan sponsor who are not investment professionals but interact with plan participants would not be considered an investment advice fiduciary.
The rule is set to go into effect on Sept. 23, 2024, and the industry would have another year to fully comply.
Bottom Line
The release of the final rule marks another step in a long-running saga. The DOL’s proposal released last October received nearly 20,000 public comments and petitions. The new rule is expected to receive significant public commentary and potential legal challenges. Plan sponsors should seek to understand the scope of the current relationships that may fall under these requirements.
Disclosures
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