With the Department of Labor’s (DOL) final fiduciary rule out now, industry leaders are quickly moving to understand what the new legislation entails.
A recent webinar hosted by Endeavor Retirement covered what retirement plan advisors need to know about the upcoming Retirement Security rule, and the basics behind the regulation.
Panelists pointed out differences between the 1975 rule and the upcoming regulation, noting how new retirement plans, like individual retirement accounts (IRAs), have greatly impacted retirement planning in the decades since ERISA [Employee Retirement Income Security Act of 1974] was enacted. Today, IRA assets are the largest segment in the defined contribution (DC) space, and are expected to account for 41% of the retirement market by 2027.
“When IRAs came out, [regulators] did not expect it to be a big thing,” said Jamie Hopkins, senior vice president of Bryn Mawr Trust, during the webinar. “The expectation was that it was almost a throwaway, it wasn’t part of ERISA. It’s interesting that the world has shifted.”
As a result of these developments, the new rule under the DOL offers more protection to the average investor, added Bonnie Treichel, an ERISA attorney and founder of Endeavor Law. Treichel observed the previous regulation as “under-inclusive,” noting that it failed to capture the “trust and confidence” that an investor would reasonably expect from working with an advisor.
“The 1975 rule is outdated, its under-inclusive, it’s not bringing enough people under that umbrella to offer protection,” Treichel said.
According to panelists, the final rule will replace the traditional five-part test from the 1975 regulation with new definitions aimed at investment advice. Specifically, a professional would be deemed an investment advice fiduciary if:
- The person either directly or indirectly (e.g., through or together with any affiliate) 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 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, and
- 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
- The recommendation also must be made “for a fee or other compensation, direct or indirect,” as defined in the final rule
Education vs. advice
Panelists noted how providing investment education would not be considered a recommendation unless there was a specific “call to action.” Advisors who have a general conversation about retirement planning, like informing investors of their employer’s retirement plan options, would not be providing a recommendation, panelists clarified.
“The 1975 rule is outdated, its under-inclusive, it’s not bringing enough people under that umbrella to offer protection.”
Bonnie Treichel, Endeavor Retirement
Using target-date funds (TDFs) as an example, Treichel added that once advisors use a prompt for the investor to act, then they’ve gone over the boundary. “As soon as I say, ‘you should take this action and move money into that target-date fund, or I think a target-date fund would be good for you, then you’ve crossed that line,” she explained.
Treichel also emphasized for advisors to clearly communicate the sessions that are strictly educational, versus those with professional advice. “When you’re having that one-on-one meeting time with participants, oftentimes they are looking for that call to action,” she said. “They’re not just looking for that blank pie chart, they’re looking for you to tell them how to start moving the pieces of that pie chart around.”
PTE 20-02 and PTE 84-24
According to panelists, covered transactions under PTE 20-02 include the receipt, either directly or indirectly, of reasonable compensation; and the purchase or sale of an investment product to or from a retirement investor, and the receipt of payment, including a mark-up or mark-down.
Under PTE 84-24, covered transactions include the receipt, directly or indirectly, by an independent producer of reasonable compensation; and the same of a non-security annuity contract or other insurance product that does not meet the definition of “security” under Federal securities laws.
However, unlike PTE 2020-02, an insurance company who sells its products through an independent agent would not be required to provide a fiduciary acknowledgement and is not treated as a fiduciary, added panelists.
Among the core standards for financial advisors under PTE 2020-02 and PTE 84-24 includes acknowledging fiduciary status, in writing, to the retirement investor; documenting and disclosing specific reasons for rollover recommendations; conducting an annual compliance review; and other criteria.
Action items
Among the list of to-dos for advisors until the rule’s September 23 effective date includes thinking about how the rule would impact clients—on both the wealth management and retirement planning side—and whether any proactive communication is necessary.
Other action items include helping plan sponsors determine if any of their service providers would be a fiduciary and developing a strategy to monitor any updates with the rule, said panelists.
Additional information on the final rule from Endeavor Retirement’s webinar can be found here.
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