The Department of Labor on April 23 finalized its much-anticipated fiduciary investment advice rule with the aim of modernizing protections for retirement savers, though not all stakeholders think it will help.
Under the Retirement Security Rule and related amended prohibited transaction exemptions the department finalized, investment advice providers must adhere to high standards of care and loyalty when they recommend investments and avoid recommendations that favor the providers’ interests at the retirement savers’ expense. The rule, which takes effect Sept. 23, covers one-time advice, such as rollovers to individual retirement accounts or annuity purchases.
In a call with reporters April 23, Lisa M. Gomez, who leads the Labor Department's Employee Benefits Security Administration as assistant secretary for employee benefits security, said the rule is a necessary update. The current definition of investment advice fiduciary was adopted in 1975, and was written before 401(k) plans existed and IRAs were less common, she said.
“The definition of an investment advice fiduciary has not kept up with this changed marketplace, leaving too many retirement investors at risk for imprudent or disloyal advice,” Gomez said.
The rule, which was initially proposed Oct. 31, will also apply a best interest standard to advice that plan sponsors receive about which investments to include in 401(k) and other employer-sponsored plan lineups.
Separately, under the rule, financial institutions overseeing investment advice providers must have policies and procedures to manage conflicts of interest and ensure providers follow these guidelines.
5-part test changes
The rule removes three prongs in the department’s 1975 five-part test used to determine when a financial professional is considered an investment advice fiduciary under the Employee Retirement Income Security Act.
The three prongs at issue require that the person providing the advice does so on a regular basis; the advice is pursuant to a mutual understanding; and that the advice will serve as a primary basis for decision-making.
In the final rule, the department stipulates that a person is considered an investment advice fiduciary under ERISA if they provide investment advice or make an investment recommendation to a retirement investor, such as to a plan participant or the plan itself; the advice or recommendation is provided for a fee or other compensation; and if the recommendation is made in at least one of several contexts.
The contexts include whether the person makes individualized investment recommendations to investors on a regular basis as part of their business and that those investors rely on the advice as in their best interest. Also, if the person acknowledges that they are acting as a fiduciary when making investment recommendations.
In the proposal, a third context was included that didn’t make it into the final rule — whether the person has discretionary authority or control over retirement assets.
Also, based on concerns it received during the comment period, the department stipulated that human resources professionals who provide investment education to employees would not trigger fiduciary status, said Ali Khawar, EBSA’s principal deputy assistant secretary, on the call with reporters.
Court challenge
The topic is fraught with history and controversy. Notably, under the Obama administration in 2016, the department finalized a regulation known as the fiduciary rule that broadened the definition of a person or entity taking on fiduciary responsibilities and replaced the five-part test. That rule, which swept up virtually any recommendation to a retirement investor, was struck down in 2018 by a three-judge panel at the 5th U.S. Circuit Court of Appeals in New Orleans.
Department officials say this rule is far more narrowly tailored than the 2016 rule.
Those who read the final rule objectively, will see that the department has done “our level best to write a rule that takes the teachings of the 5th Circuit, the lessons we learned from the comments and to come up with a final rule that honors peoples’ legitimate expectations that the advice they receive from trusted advisers is going to be in their best interest without posing undue burdens on folks,” said Timothy D. Hauser, EBSA’s deputy assistant secretary for program operations, on the call with reporters. “And I think we’ve gotten there, but we’re going to look forward to all the reactions.”
Trade groups representing the advice and insurance industries pushed back hard against the proposal and are widely expected to challenge the final rule in court.
Among their concerns raised during the comment period, opponents claim the new fiduciary definition is too broad, the rule is a rehash of the now-vacated 2016 rule, and that there are already sufficient regulations covering the marketplace, such as the Securities and Exchange Commission's Regulation Best Interest and the National Association of Insurance Commissioners' conduct standards for insurance agents and insurance companies recommending annuities.
“The Department of Labor’s fiduciary rule sequel is just as bad as the original, and just as likely to meet the same fate in court,” said Chris Iacovella, president and CEO of the American Securities Association, in a statement.” The department's rushed rule-making process will threaten retirement savings and limit access for millions of hardworking Americans. ASA will assess the rule and work with our members to determine how to protect the interests of America’s investors, including potential litigation.”
