The second Trump presidency is widely expected to lead to a relaxation of fiduciary standards, emphasizing a less-stringent regulatory environment for financial advisors handling retirement accounts.
“This administration won’t defend the final rule in the courts, so it will be back to the five-part test from 1975.”
Endeavor Retirement’s Bonnie Treichel
It could also put the kibosh on considering environmental, social and governance (ESG) factors in retirement plan investment decisions (more on this below).
The relaxation of fiduciary standards could involve modifying or abandoning the Biden administration’s Retirement Security Rule, which attempted to expand the definition of an investment advice fiduciary under ERISA—and which has been held up in the courts, preventing it from taking effect in September 2024 as originally scheduled.
“The Retirement Security Rule will be effectively dead under the Trump-Vance administration,” Endeavor Retirement Chief Solutions Officer Bonnie Treichel told 401(k) Specialist Wednesday. “This administration won’t defend the final rule in the courts, so it will be back to the five-part test from 1975. However, advisors (and their home office) should keep in mind that PTE 2020-02 will still be available and may have usefulness beyond just rollovers.”
Recent fiduciary rule history
Historically, the first Trump administration rolled back fiduciary regulations, including the 2016 Obama-era rule that required financial advisors to act in the best interests of their clients when handling retirement accounts. This rule was vacated in 2018 by the Fifth Circuit Court of Appeals.
In 2019, the first Trump administration introduced a more lenient version of the fiduciary rule, allowing broker-dealers to receive commission compensation that was once prohibited for advising clients on ERISA-governed plans, provided they acted in the client’s best interest. Developed by the Employee Benefits Security Administration (EBSA), it came on the eve of the SEC’s implementation of Regulation Best Interest (Reg BI).
Upon taking office in January 2021, the Biden administration permitted this rule to take effect in February 2021 but indicated plans to review and potentially revise it. In April 2021, the DOL issued guidance clarifying that rollover recommendations from employer-sponsored plans to individual retirement accounts (IRAs) could constitute fiduciary advice, thereby subjecting advisors to fiduciary standards.
In October 2021, the DOL proposed a new rule titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” aiming to clarify fiduciary duties concerning environmental, social, and governance (ESG) factors in investment decisions.
ESG back into the shadows
Speaking of ESG, the second Trump administration may well attempt to limit or eliminate fiduciaries’ consideration of ESG factors when selecting plan investments, reversing the current DOL stance that allows such considerations.
Treichel said the Final ESG regulation that became effective in January 2023 may not survive under Trump’s second term, particularly in combination with the demise of Chevron from the Loper Bright case.
“For retirement plan advisors, they have seen back-and-forth around ESG investing guidance for many years, and I am not sure that a change in the final regulation really matters. For retirement plan advisors, so long as they continue to follow a prudent process and follow their IPS in line with the duty of loyalty under ERISA Section 404, then the unwinding of the ESG regulation may not matter,” Treichel said. “Again, this is already required for all investments for ERISA-covered plans, and ESG has never gotten ‘a pass’ so a change under the Trump-Vance administration may not change much.”
Meanwhile, ESG fund managers were being urged by analysts to keep their lawyers very close after news broke of Trump’s win early Wednesday, as they warned that investors intending to continue with ESG portfolios will need to ensure they understand the intricacies of the U.S. legal system well.
“We’d encourage all ESG fund managers to have a lawyer on the team, or on speed-dial,” analysts led by Aniket Shah wrote in a note to clients on Wednesday, as published by Bloomberg. “Antitrust risk remains high for asset managers in ESG; there haven’t been any cases yet, thus there is no legal precedent. Further, legal risks regarding fiduciary duty will stay relevant as states enforce anti-ESG laws.”
Republicans have long asserted that firms embracing ESG are ignoring their fiduciary duties, while Republican attorneys general have alleged that financial firms that incorporate ESG metrics may be guilty of collaborating against the fossil-fuel industry, and fanning inflation.
Analysts say this may lead to a rise in what is being called “greenhushing,” a phenomenon of not making public any work on ESG.
SEE ALSO:
• Second Trump Presidency: End of Tax on Social Security Benefits?