On April 25, 2024, the Department of Labor (DoL) issued the final version of its Retirement Security Rule (the “Final Rule”), which imposes an ERISA fiduciary standard “that applies uniformly to all investments that retirement investors may make with respect to their retirement accounts“. The new rule represents the latest attempt by regulators to define the types of individuals and advice that are subject to a fiduciary obligation, following on the heels of the SEC’s Regulation Best Interest (Reg BI) and Commission Interpretation Regarding Standard of Conduct for Investment Advisers, as well as the DoL’s own 2016 fiduciary rule (which was struck down by Federal courts in 2020) and Prohibited Transaction Exemption 2020-02.
Specifically, the DoL’s new Retirement Security Rule defines an “investment advice fiduciary” as anyone who makes an investment recommendation to a retirement investor which is provided for a fee or other compensation (e.g., commissions), and who holds themselves out as a trusted adviser by either stating they are acting as a fiduciary or otherwise indicates that they are making individualized recommendations based on the investor’s best interest. And although many advisors may have been already subject to a fiduciary standard under existing SEC or DoL regulations, the DoL’s fiduciary standard is more stringent than others (e.g., requiring advisors not just to disclose but to eliminate certain conflicts of interest), meaning that even advisors who already considered themselves fiduciaries under previous rules may find themselves needing to update their processes to comply with the DoL’s new standards.
In practice, the DoL’s Final Rule means that financial advisers who advise clients about rolling over assets from an employee retirement account like a 401(k) plan into an IRA are now subject to ERISA fiduciary obligations. Most notably, the new DoL rule is meant to capture one-time recommendations by firms and their representatives made to retail retirement investors for almost any type of investment, meaning that the Final Rule covers not only RIAs and broker-dealers, but also insurance agents, bank employees, and others providing advice about how retirement investors should invest their 401(k) plan or IRA assets. It also covers many types of investments, including annuities, fixed-indexed annuities, CDs and other banking products, digital assets, commodities, and real estate, whereas previous rules like Reg BI and PTE 2020-02 applied only to securities like stocks, bonds, and funds.
In addition to issuing the Final Rule, the DoL modified existing Prohibited Transaction Exemptions (PTE 2020-02 and PTE 84-24) as part of its rollout of new rules around retirement advice. The amendments to the exemptions notably include revisions to PTE 2020-02’s disclosure requirements to bring them more in line with SEC’s Reg BI.
In sum, the Final Rule expands ERISA’s stringent fiduciary obligations to cover almost any situation where advice is provided for a fee to a retirement investor where there is an expectation that the advice being given is in the investor’s best interest. The Final Rule covers advisory firms and their representatives providing “fiduciary investment advice” to ERISA and non-ERISA plans, including IRAs. The Final Rule also covers broker-dealers and their representatives, insurance agents, bank branch employees selling bank products, and almost any other entity providing recommendations to retirement investors about investing their retirement assets. And with the new rules taking effect on September 23, 2024 (with a one-year transition period after the effective date for some of the conditions in the Prohibited Transaction Exemptions), the time is rapidly approaching for advisors to begin complying with DoL’s expanded fiduciary standards!
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