On April 23, 2024, the DOL released the final Retirement Security Rule (the 2024 final rule) defining who is an investment advice fiduciary for purposes of ERISA and the Code. The DOL also issued final amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries. The 2024 final rule follows and largely resembles a proposed rule issued on November 7, 2023. Please see our November 9, 2023, edition of Compliance Corner regarding the proposed rule.
The 2024 final rule represents the DOL’s most recent effort to significantly expand the definition of an investment advice fiduciary with respect to retirement investors. (A prior and similar 2016 DOL fiduciary rule was set aside as arbitrary and capricious by the Fifth Circuit Court of Appeals (Fifth Circuit) in litigation.) Under the 2024 final rule, retirement investors include not only ERISA retirement plan participants but also IRA owners, HSA accountholders, and fiduciaries with authority or control with respect to an ERISA plan or IRA. The DOL maintains the updates are necessary to protect retirement investors by addressing gaps in their relationships with financial professionals whose investment recommendations (e.g., regarding IRA rollover assets) are not currently treated as fiduciary advice under ERISA or other federal or state laws.
The 2024 final rule’s new investment advice fiduciary definition replaces the current five-part test that was adopted by the DOL in 1975. The DOL now views the 1975 rule as insufficient and underinclusive, given changes in retirement savings vehicles and the investment advice marketplace.
Under the 2024 final rule, a person is an investment advice fiduciary if they directly or indirectly (e.g., through or together with any affiliate) make professional investment recommendations to investors on a regular basis as part of their business and the facts and circumstances objectively indicate that the recommendation:
The recommendation must be provided for a fee or other compensation, direct or indirect, as defined in the final rule.
Additionally, an investment advice fiduciary includes a person who represents or acknowledges that they are acting as an ERISA fiduciary with respect to the recommendation.
Under the 2024 final rule, the determination of whether a recommendation has been made is aligned with the SEC’s “best interest” framework, which considers factors such as whether the communication could reasonably be viewed as a “call to action” that would influence an investor to trade a particular security. The more individually tailored the communication to a specific customer or targeted group about an investment, the greater the likelihood that the communication may be viewed as a recommendation. Conversely, offering general investment information or educational materials to investors would generally not be considered a recommendation and investment advice.
Unlike the 1975 rule, the 2024 final rule does not require that advice be provided pursuant to a mutual agreement or as the primary basis for investment decisions to be deemed fiduciary advice. As a result, the 2024 final rule has raised concerns among some industry stakeholders that certain financial professionals, such as insurance agents and brokers, will potentially be deemed fiduciaries by a transaction in which a retirement investor accepts their recommendation of a particular investment.
In fact, on May 2, 2024, a lawsuit, Federation of Americans for Consumer Choice, Inc. v. DOL, was filed against the DOL by a trade organization whose members include insurance agents. The lawsuit challenges, among other items, the DOL’s authority to issue the 2024 final rule under ERISA and the Code. The complaint asserts that the DOL’s fiduciary definition in the 2024 final rule is inconsistent with Congress’s intent as expressed in the text of ERISA and the Code, the historical and common law understanding of the term (based on a special relationship of trust and confidence), and the standards previously articulated by the Fifth Circuit. The lawsuit requests that the 2024 final rule and related amendments to PTE 84-24 (which provides protection for ERISA/IRA transactions when commissions are collected in connection with an annuity purchase) be vacated and that the DOL be enjoined from enforcing the new guidance.
Generally, the 2024 final rule and PTE amendments are scheduled to take effect on September 23, 2024, although there is a one-year transition period after the effective date for certain conditions in the PTEs. However, the legal challenges could potentially affect the implementation of the 2024 final rule.
ERISA retirement plan sponsors should be aware of the issuance of the 2024 final rule, which may impact the role of financial professionals interacting with plan fiduciaries or participants. They should also continue to ensure that ERISA plan investment decisions are made in the best interest of participants and beneficiaries and that the investment decision-making process is clearly documented. Sponsors should also monitor for further developments, which we will report on in future Compliance Corner editions.
Retirement Security Rule: Definition of an Investment Advice Fiduciary (dol.gov) » Defining Investment Advice Fiduciary | U.S. Department of Labor (dol.gov) » Federation of Americans for Consumer Choice Inc. v. DOL »
PPI Benefit Solutions does not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.
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