DOL, White House unveil latest fiduciary proposal to cover one-time rollover advice

After much anticipation, the White House and Department of Labor on Oct. 31 unveiled a new rule proposal to amend the definition of the term "fiduciary" and require rollover advice be in the best interest of the saver.

In its proposed "Retirement Security Rule," the department calls for changing its fiduciary definition by removing the "regular basis" prong of the five-part test used to determine when a financial professional is considered an investment advice fiduciary under ERISA. The move would lead one-time rollover advice to fall under the fiduciary definition if the other parts of the test are met.

"Amounts held in workplace retirement accounts often represent the largest savings an individual has, and financial services providers often have a strong economic incentive to recommend that investors roll money into one of their institutions' IRAs or annuities," the department said in an accompanying fact sheet. "Applying the ERISA fiduciary standard in these transactions will provide significant protections for retirement investors."

The proposal would 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.

"Retirement funds are often the largest savings that people have, said Acting Labor Secretary Julie Su during an Oct. 30 call with reporters. "Little-by-little, paycheck-by-paycheck, year-after-year, people add to these accounts over their entire working lives. So when individuals or companies, including small businesses, hire an adviser to help them make investment decisions regarding retirement savings, they should be able to trust the advice they get."

The proposal, which will have a 60-day public comment period upon publication in the Federal Register, would align with the Securities and Exchange Commission's Regulation Best Interest to stipulate that retirement advisers must provide advice in the saver's best interest, regardless of whether they are recommending a security or insurance product.

Currently, the SEC's rule package, which took effect in 2020, does not generally cover advice regarding commodities or insurance products, so such advice is governed by state law. For example, Reg BI does not cover advice when an IRA owner purchases an annuity, but such a purchase would be covered by the department's proposal.

"Of course, responsible retirement advisers deserve to be paid for their work, but retirement advisers shouldn't be paid more for recommending one investment product over another if it isn't in the client's best interest," said Lael Brainard, director of the National Economic Council, on the call.

As part of the Oct. 31 proposal package, the department is also offering amendments to several prohibited transaction exemptions, including 2020-02 and 84-24, so that fiduciaries who use them must follow consistent and protective compliance requirements, including an obligation to act in retirement investors' best interest, according to administration officials.The department said it intends to hold a public hearing about 45 days after the proposals are published in the Federal Register.

The subject of fiduciary investment advice is not a new frontier for the department.

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 a five-part test used to determine whether an investment professional or financial institution serves as a fiduciary.

But in 2018, a three-judge panel at the Fifth U.S. Circuit Court of Appeals in New Orleans vacated the rule in a 2-1 decision, saying the department exceeded its legal authority.

The Trump administration decided not to appeal the decision, but in 2020 it announced a final rule reinstating the five-part test. Then later that year, it finalized a prohibited transaction exemption that permitted investment-advice fiduciaries to receive compensation for more types of guidance, including advice to roll over assets from a retirement plan to an IRA.

The Biden administration in 2021 issued guidance in the form of frequently asked questions that related to the Trump-era exemption. That guidance has faced legal challenges, and in February, a federal judge vacated one of the FAQs that outlined when rollover advice is considered to be on a "regular basis," a component of the five-part test.An administration official said that while the 2016 rule was relatively broad in that it swept in nearly anyone who provided investment advice for a fee, this proposal is more targeted.

Regardless, industry groups have already signaled heavy opposition to the idea.

Wayne Chopus, president and CEO at the Insured Retirement Institute, said in a LinkedIn post that his organization "will fight this proposal just as we did with DOL's 2016 poorly concocted fiduciary rule that also masqueraded as consumer protection but instead caused extensive harm. A federal court vacated that rule but not before 10 million smaller retirement account owners, with more than $900 billion in retirement savings, lost the ability to work with their preferred financial professionals."

On Capitol Hill, Rep. Virginia Foxx, R-N.C., chair of the House Education and the Workforce Committee, said in a statement that the latest proposal is "just new lipstick on the same old pig, and it will harm retirement plans, retirees, and savers."

She added, "DOL's proposal reaches well beyond its jurisdiction. Instead of regulating retirement plans, DOL is trying to regulate what individuals do with their own retirement savings. This kind of overreaching interference spells disaster."

But Foxx's counterpart on the committee, Ranking Member Bobby Scott, D-Va., had a different viewpoint and said the proposal is crucial to help workers better prepare for retirement. "While most advisers put their retirement clients' interests first, unscrupulous retirement professionals continue to pad their own pockets by steering clients to high-fee investment products that produce lower returns for retirement savers," Scott said.

Consumer groups also welcomed the proposal. In a joint statement, steering group members of the Save Our Retirement coalition, which includes organizations like AARP, AFL-CIO, Consumer Federation of America and the Pension Rights Center, said the proposal is "a major milestone in the long fight to bring millions of Americans one step closer to a secure, dignified retirement. We look forward to reviewing this proposal in detail, submitting our comments, and working to help craft the strongest possible rule to ensure that retirement savers receive investment advice that is in their best interest, not the self-interest of the financial professionals they turn to for advice about their retirement investments."

When asked last month if the latest proposal is likely to face a legal challenge, Fred Reish, a partner at Faegre Drinker Biddle & Reath, told Pensions & Investments: "I can't imagine that it won't be (challenged), I don't even see that as one of the options on the table."