DOL Proposes Retirement Security Rule Defining Investment Advice Fiduciary

On November 3, 2023, the DOL published a proposed rule broadening the definition of an investment advice fiduciary under ERISA. The newest iteration of this rule is the most recent attempt by the DOL to update the definition of fiduciary after the 2016 Conflict of Interest Rule (the 2016 rule) was set aside by the US Court of Appeals for the Fifth Circuit in litigation. The newest iteration of this rule is the most recent attempt by the DOL to update the definition of fiduciary after the 2016 Conflict of Interest Rule (the 2016 rule) was set aside by the US Court of Appeals for the Fifth Circuit in litigation.

Ultimately, the DOL seeks to again update the original five-part test that has been used to identify fiduciaries who render investment advice for a fee. Under the five-part test, an investment advice fiduciary is one who: 1) renders advice as to the value of securities; 2) on a regular basis; 3) pursuant to a mutual agreement; 4) the advice serves as the primary basis for investment decisions; and 5) the advice is individualized. The DOL views the five-part test as outdated, given the developments in retirement savings vehicles and changes in the investment advice marketplace. They posit that the five-part test is “underinclusive” in its application. Specifically, they argue that the “regular basis,” “mutual agreement,” and “primary basis for investment decisions” requirements defeat investor expectations of impartial advice and allow for some retirement advice to occur without an applicable best interest standard.

The proposed rule deems a person to be an investment advice fiduciary if they:

• Provide investment advice or make an investment recommendation to a retirement investor (including a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA fiduciary).
• Charge a fee or receive other compensation, direct or indirect.
• Make the recommendation in one of the following contexts:
  • They directly or indirectly have discretionary authority or control with respect to purchasing or selling securities or other investment property for the retirement investor.
  • They make investment recommendations to investors on a regular basis as part of their business. The recommendations are based on the particular needs or individual circumstances of the retirement investor, and the investor may rely upon the recommendations as a basis for investment decisions that are in their best interest.
  • They represent or acknowledge that they are acting as a fiduciary when making investment recommendations.

The DOL believes this proposed rule will create a uniform standard for investment transactions that are not currently covered by federal securities laws (including the SEC’s Regulation Best Interest), state laws, or conduct standards. They also believe it to be more narrowly tailored than the 2016 rule and responsive to the Fifth Circuit’s arguments.

The DOL proposes that the rule take effect 60 days after the publication of a final rule in the Federal Register. They are requesting comments on many aspects of the rule.

In addition to the proposed rule, the DOL proposed amendments to several Prohibited Transaction Exemptions (PTEs):

• PTE 2020-02 – This PTE provides the conditions by which investment advice fiduciaries may be compensated for investment advice. The proposed amendment would build on the existing PTE by proposing additional disclosures to inform retirement investors and providing more guidance to financial institutions and investment professionals on impartial conduct standards. In a departure from the 2016 rule, the proposed amendment to the PTE will not require a contract for investment advice to IRAs. Instead, financial institutions will be tasked with reporting any nonexempt prohibited transactions stemming from fiduciary investment advice to the IRS through excise tax filings.
• PTE 84-24 – This PTE allows IRA fiduciaries to receive compensation when plans and IRAs enter certain insurance and mutual fund transactions that the fiduciaries recommend. The proposed amendment would impose conditions but provide exemptive relief to independent producers who serve as fiduciaries and recommend non-securities annuities or other insurance products to retirement investors on a commission or fee basis.
• PTEs 75-1, 77-4, 80-83, 83-1, and 86-128 – These PTEs currently provide investment advice fiduciaries with relief for different types of transactions involving employee benefit plans and IRAs. The proposed amendments would remove fiduciary investment advice from the purview of these PTEs, allowing the application of a single standard of care (as dictated in PTE 2020-02) to all fiduciary investment advice, regardless of the specific type of product or advice provided. They also make certain other administrative changes.

The industry will likely provide robust commentary to the DOL on this rule. While the rule goes through the rulemaking process, it’s important for retirement plan fiduciaries to remember their duties under ERISA. Taking steps to ensure that any investment decisions are made in the best interest of plan participants and beneficiaries remains the standard under ERISA, and plan sponsors should work with their service providers to document adherent processes.

Retirement Security Rule: Definition of an Investment Advice Fiduciary »
Fact Sheet: Retirement Security Proposed Rule and Proposed Amendments to Class Prohibited Transaction Exemptions for Investment Advice Fiduciaries »