When word got out that the Department of Labor (DOL) was issuing its proposed fiduciary rule this week—and that President Joe Biden would speak on its framing—the retirement planning advisory industry had a lot to say.
It seemed as if industry institutions, retirement plan advisors, and everyone in between had a strict attitude regarding the proposal, now masked as the “Retirement Security Rule: Definition of an Investment Advice Fiduciary.” Some welcomed the new proposal, noting that it would protect retirement plan investors from biased advice. Others criticized the rule for several reasons, including potentially subjecting industry-adjacent professionals to ERISA, and possibly stirring advisors away from smaller plan accounts.
Almost all concluded with the idea that if enacted into law, the proposal would cause several changes to the DOL’s five-part test. Let’s break those down.
The beginning and 2020 reinstatement
The DOL’s five-part test was established in 1975, when almost half of the U.S. workforce had a defined benefit (DB) plan, individual retirement accounts (IRAs) were a rarity and defined contribution (DC) plans non-existent.
Under the test, fiduciaries included those who, according to Groom Law Group:
- Rendered advice to a plan as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
- On a regular basis;
- Pursuant to a mutual understanding;
- That such advice will be a primary basis for investment decisions; and
- The advice will be individualized to the plan.
After the DOL adopted a broader definition of investment advice in 2016 (which was ultimately vacated in 2018) the agency reinstated the five-part test in 2020, then subjecting fiduciaries to several prohibited transaction provisions and exemptive relief.
Changes to the five-part test
Despite prior alterations to the five-part test, loopholes for investment professionals to avoid fiduciary status still existed, said Matthew Eickman, national retirement practice leader at Qualified Plan Advisors, in an interview with 401(k) Specialist.
For example, under the five-part test, a professional could reason that they were only giving a singular piece of advice to a client, rather than guidance on a regular basis. Or, they could deny having a mutual understanding or agreement with an advisee. “It was so easy for an investment professional who sought to avoid any fiduciary status to find a way out,” Eickman stated.
“We want to move to a situation where when individuals receive advice regarding distributions, regarding rollovers, regarding what to do with the dollars they receive when they rollover, that they should feel like they’re in a position of trust…”
Matthew Eickman, QPA
According to Qualified Plan Advisors, under the proposal, a person would be a fiduciary if he or she provides investment advice or makes an investment recommendation to a retirement investor (e.g., plan, plan fiduciary, plan participant, IRA owner) for a fee or other compensation in one of three contexts:
- The person directly or indirectly has discretionary authority or control over the investor’s investment property;
- The person makes investment recommendations to investors on a regular basis as part of his or her business and the recommendation is provided under circumstances indicating it is based on the investor’s particular needs; or
- The person represents or acknowledges that he or she is a fiduciary.
Eickman finds the leading change between the proposal and the five-part test focuses less on whether the provider is avoiding fiduciary status, and instead on the context in which the advice is provided.
“We want to move to a situation where when individuals receive advice regarding distributions, regarding rollovers, regarding what to do with the dollars they receive when they rollover, that they should feel like they’re in a position of trust, and not feel like that advisor could work through a five-part test and avoid fiduciary status just by finding that little loophole,” he said.
Bonus: PTE 84-24
While not a part of the five-part test now, an amendment in the new DOL fiduciary proposal would subject independent insurance agents recommending annuity rollovers—who are not liable to the Securities and Exchange Commission (SEC) Regulation Best Interest (Reg BI) standard of conduct—under ERISA.
According to the DOL, PTE 84-24 would “provide exemptive relief to fiduciaries who are Independent Producers that recommend annuities from an unaffiliated Insurer to Retirement Investors on a commission or fee basis if certain protective conditions are met.”
The proposed change has been met with extreme pushback from insurance lobbyist groups and organizations who accused the Biden Administration of labeling retirement plan costs as “junk fees” and argued that the rule would jeopardize access to financial advice for lower- and middle-income workers.
The American Council of Life Insurers (ACLI) issued a statement blasting the Department of Labor’s proposed legislation for “conflating legitimate retirement costs with junk fees is a scare tactic to push regulations that will hurt Americans in need of greater financial certainty,” while the National Association of Insurance and Financial Advisors said the rule would “limit consumers’ choices and curtail the access of many middle- and lower-income investors to individualized advice and services.”
While the amendment would be a sizeable one for the insurance industry, Eickman says it should be embraced. If anything, the rejection it has received is a sign that its well-needed within the annuity space, especially considering past controversy and stigmas regarding guaranteed lifetime income products.
“This is a near night and day difference for many insurance salespeople,” he added. “What’s ironic about that is, the louder the pushback we hear, the more clearly we can see the need for the fiduciary standard to apply to that industry.”
Commentary period
As of November 3, the nearly 500-page proposed rule is available on the Federal Register for commentary. The commentary period has a 60-day window, and will close after January 2, 2024. The DOL also noted that it will hold a public hearing approximately 45 days following the proposal’s date of publication in the Register, and added that specific information regarding the date, location, and submission of requests to testify will be published at a later date.
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