News that the U.S. Department of Labor (DOL) had released its final fiduciary rule early Tuesday afternoon rocked the retirement planning industry.
Now that the final regulation is officially out, industry officials are moving to understand what’s changed from the 2023 proposal.
The DOL’s Retirement Security Rule aims to update the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC).
According to the DOL’s proposal in October, advisors who provide recommendations of “any securities transaction or other investment transaction or any investment strategy involving securities or other investment property” to a “retirement investor,” and who satisfied any aspects of a new three-part test would be subject to fiduciary status.
Now, early reviews of the final rule show that the DOL did leave out one feature of its three-part test. Specifically, the federal agency cut a part of the rule that would direct attention on whether advisors have discretion over assets.
Instead, the rule now focuses on the last two parts: the context of the relationship between the advisor and the client, and whether an advisor has proclaimed fiduciary status.
In a press briefing with reporters, the Department of Labor said it had slashed that part of the test because other aspects of ERISA had already tackled it.
The DOL also cleared up language that would exempt human resource (HR) professionals who provide retirement planning education to participants from fiduciary status.
Additionally, the agency announced smaller changes to updated prohibited transaction exemptions that impact insurance agents. While the final rule will include updates to PTE 84-24 and PTE 2020-02—the latter of which extends the same standards of care to insurance professionals as it does fiduciaries—it does leave out some disclosure requirements in order to align with the Securities and Exchange Commission’s (SEC) Regulation Best Interest, according to the DOL.
Lastly, the DOL extends its final rule to broadly apply to all and any fiduciary recommendations made to retirement investors, “even if those recommendations fall outside the scope of the SEC’s authority or Regulation Best Interest’s coverage,” the agency noted in a new fact sheet released today.
‘Narrowly tailored’ regulation compared to ‘broad’ 2016 rule
The DOL’s fact sheet, issued following the final rule’s announcement, says its final rule today differs from the “broad” fiduciary rulemaking in 2016. Instead, the new regulation is “narrowly tailored” compared to the 2016 rule, which applied to nearly all paid recommendations made towards retirement investors.
According to the fact sheet, other changes from the 2016 rulemaking to today’s rule includes:
- This final rulemaking limits fiduciary status to recommendations made by persons who effectively hold themselves out as occupying a position of trust and confidence with respect to the retirement investor, as described above.
- The final rule and exemptions, unlike the 2016 rulemaking, contain no contract or warranty requirements. The sole remedies for non-compliance are precisely those set forth in ERISA and the Code. Thus, in the context of advice to IRAs, the remedies include only the imposition of excise taxes under the Code.
- The broad advice exemption, PTE 2020-02, as finalized, specifically provides an exemption from the prohibited transaction rules for pure robo-advice relationships, unlike the 2016 rulemaking.
- Unlike the 2016 rulemaking, PTE 84-24 has been specially tailored for independent insurance agents and does not require insurance companies to assume fiduciary status with respect to these agents, an important concern of insurers with respect to the 2016 rulemaking.
- Neither PTE 2020-02 nor PTE 84-24, as amended, require financial institutions to disclose all their compensation arrangements with third parties on a publicly available website, as was required by the 2016 rulemaking.
Differences in 1975 rule vs. today
The DOL makes a case for supporting the upcoming regulation, especially considering what it calls “loopholes” currently included in the original 1975 rule. The fiduciary rule was previously adopted nearly 50 years ago, when most retirement plans were defined benefit (DB) pension plans that were primarily managed by professional money managers and funded by employers.
Since today’s retirement plans of 401(k)s and individual retirement accounts (IRAs) put the onus on participants to make important investment decisions regarding their retirement savings, the Department of Labor says it believes more guards should be added to protect participants against investment losses. This includes extending fiduciary status to investment advisors, insurance agents, and other professionals who provide retirement savings recommendations on a “one-time” basis to participants.
“…One-time advice is often the most important advice the retirement investor will ever receive,” the DOL stated. “For example, few recommendations are likely to be more important than advice to pull a lifetime of savings out of a retirement plan to buy an annuity that is supposed to cover benefits for the rest of the investor’s life. Yet, the 1975 rule routinely failed to treat such important recommendations as fiduciary advice that should be both prudent and loyal, no matter the investor’s reasonable reliance on the recommendation from a trusted professional purporting to act in their best interest.”
“When an individualized recommendation comes from an investment professional holding themselves out as someone who is acting in the investor’s best interest, it is only right that the advice meet a fiduciary standard,” the DOL concluded.
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