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The Department of Labor’s (DOL) new definition of fiduciary investment advice for retirement investors becomes effective September 23, 2024. Under the new rule, more brokers, advisors, and insurance agents will be held to an ERISA fiduciary standard when providing individualized recommendations to retirement plan participants and IRA investors, including one-time rollover or distribution advice. Not all recommendations and communications made to retirement investors will trigger fiduciary status though.

To trigger functional fiduciary status for a specific recommendation, a financial professional must meet all these requirements:

• The advice giver is (directly or indirectly through or with an affiliate) in the business of making professional investment recommendations
• The recommendation is personalized based on the retirement investor’s particular needs or individual circumstances (recommendation includes a call to action)
• A reasonable investor in like circumstances would believe the recommendation is based on the investor’s best interests
• The financial professional (or an affiliate) receives compensation in connection with the recommendation

If the facts and circumstances surrounding a recommendation do not meet these requirements, the recommendation will not be subject to the fiduciary rule.

Communications That Are Not Fiduciary Advice

The DOL’s preamble and final regulations identify certain types of communications that generally do not fit the definition of fiduciary investment advice, so long as the financial professional has not acknowledged fiduciary status and does not make a personalized recommendation to the retirement investor.

• “Hire me” communications touting the advisor’s services and other information about their (or an affiliates’) services
• A sales pitch that includes a recommendation to purchase a particular investment or pursue a particular strategy (e.g., “You’ll love the return on X stock in your retirement plan, let me tell you about it.”)
• Investment education and information on retirement savings
• Offering or marketing of a platform with a set line-up of investments (e.g., an IRA product)
• Service provider call center communications involving investment-related information

Investment Education or Information Defined

The DOL defined “education” vs. advice in 1996 (Interpretive Bulletin (IB) 96-1) and has confirmed in the 2024 final rule that those interpretations still apply.1 This is the case irrespective of who provides the information (e.g., plan sponsor, fiduciary, or service provider), the frequency with which the information is shared, and the form in which the information is provided (e.g., on an individual or group basis, in writing or orally, or via video or computer software). In an interview with American Retirement Association’s Brian Graff, Tim Hauser, the deputy assistant secretary for program operations of the Employee Benefits Security Administration, stated that the DOL is not trying to “move any of those lines” with the new rule.2

Based on IB 96-1 and current DOL guidance, the following types of information may be provided to retirement savers without triggering ERISA Title I or Title II fiduciary status, so long as a personalized recommendation is not made.

 

Investment or Plan/IRA Information

Benefits of plan/IRA participation or increasing contributions

Terms of the plan/IRA or operations

Forms of distribution & advantages/disadvantages of each option

Information about & tax benefits associated with rollovers into IRAs

Fee & expense information

Investment objectives & philosophies

Risk & return characteristics or historical return information

General financial, investment & retirement information

Standard investment & financial concepts such as diversification, risk & return, dollar-cost averaging, & tax-deferred investments

Historic differences in rates of return between different asset classes

Effects of fees & expenses on rates of return

Estimating future retirement income needs

Determining investment time horizons & assessing risk tolerance

General strategies for managing assets in retirement (e.g., systemic withdrawals, annuitization), including options outside the plan/IRA

Asset allocation models

Information & materials (e.g., pie charts, graphs, case studies) that provide illustrations of model investment portfolios for hypothetical individuals with different time horizons & risk profiles

A properly positioned & described asset allocation model is investment education, even if it identifies specific investment options available under the plan or the plan has only one option available in a particular investment category

Interactive investment materials

Questionnaires, worksheets, & software that enable individuals to estimate future retirement needs or evaluate the impact of various investment allocations on retirement income

Next Time

Some advisors and service providers may choose to limit their product and rollover communications to educational services. If they refrain from making recommendations that meet all aspects of the new definition of fiduciary advice, they would not be subject to the DOL’s fiduciary rule for providing this information.

If financial professionals make recommendations to retirement investors that meet the DOL’s definition of fiduciary investment advice, compensation for that advice is prohibited unless they satisfy the conditions of Prohibited Transaction Exemption (PTE) 2020-02 (or PTE 84-24 for independent insurance agents).

Stay tuned for IRALOGIX’s next article on how those who provide rollover recommendations subject to the DOL fiduciary rule can structure their services to comply with PTE 2020-02, satisfy the fiduciary standards, mitigate conflicts of interests, and receive compensation that would otherwise be prohibited (because the compensation would not have been paid but for the recommendation).
 

 

 

 

 
1 Interpretive Bulletin 96-1, June 11, 1996, https://www.federalregister.gov/documents/1996/06/11/96-14093/interpretive-bulletin-96-1-participant-investment-education

2 “Tim Hauser – the Final Fiduciary Rule’s Myths and Controversies,” DC Pension Geeks podcast, May 13, 2024, The American Retirement Association, https://www.napa-net.org/dc-pension-geeks-podcast

Financial professionals working with retirement savers will be subject to a new rule that goes into effect on September 23, 2024. The Department of Labor (DOL) has updated the rule under ERISA and the Internal Revenue Code that defines when a person is a fiduciary for providing nondiscretionary advice to a retirement plan sponsor or an individual investor in a workplace retirement plan, IRA, or HSA. Under the new rules, more brokers, advisors, and insurance agents will be held to a fiduciary standard when providing personalized recommendations to retirement investors, including one-time rollover advice.

The DOL updated its 1975 rule to reflect today’s complex retirement savings market and to better protect retirement investors by requiring trusted advice providers to follow high standards of care and loyalty when making investment recommendations. The updated rule, according to the DOL, fills important gaps in its and other regulatory agencies’ rules to ensure that financial professionals adhere to more uniform conduct standards and mitigate their conflicts of interest whether they make recommendations to retirement investors on securities or non-securities investments, or recommendations to move retirement savings to another plan or IRA. 

New Definition of Investment Advice Fiduciary

The new rule replaces the 1975 five-part test for determining when nondiscretionary investment recommendations trigger fiduciary status. The new test focuses on whether a financial professional has effectively held themselves out as occupying a position of trust and confidence with respect to the retirement investor. Three criteria must be met:

1. Directly or indirectly (e.g., through or together with any affiliate) make professional investment recommendations regularly, as a part of their business
2. The circumstances reasonably indicate that a recommendation
   • is based on a review of the retirement investor’s particular needs or individual circumstances,
   • reflects the application of professional or expert judgment, and
   • may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest
3. Receive a fee or other direct or indirect compensation in connection with the recommendation

A financial professional is also an investment advice fiduciary if they represent or acknowledge that they are acting as an ERISA fiduciary, and receive a fee or other compensation, with respect to the recommendation. 

Changes in the New Rule

• Does not include a private right of action for IRA investors, or other contract or warranty requirements that were part of the 2016 rule that was vacated by Fifth Circuit in 2018
• Sole remedies for non-compliance are those set forth in ERISA and the Code, which include only the imposition of excise taxes in the context of advice to IRAs
• Is broader than the 1975 rule but more narrow than the 2016 rule or the 2023 proposal as to the recommendations that constitute fiduciary advice and makes clear that the new fiduciary status test is objective
• Confirms that sales executions or sales recommendations that do not satisfy the objective test are not fiduciary advice
• States that investment information or education is not fiduciary advice
• Explains that an asset manager does not render fiduciary advice by making recommendations to a financial professional or firm that, in turn, will render advice to retirement investors in a fiduciary capacity

Investment Advice Fiduciary Needs PTE

Financial professionals who meet the DOL’s definition of investment fiduciary must satisfy the conditions of a prohibited transaction exemption (PTE) to mitigate conflicts of interests and receive payment that would otherwise be prohibited because the payment is directly affected by the recommendation. The DOL amended several of its existing PTEs to ensure all retirement investors receive the same standard of care, regardless of the product or service they receive. As a result, the only exemptions available for receiving conflicted compensation is PTE 2020-02 for advice with respect to the wide universe of investments recommended to retirement investors, and PTE 84-24 for recommendations by independent insurance agents.

The DOL states that the compliance obligations in PTE 2020-02, even with amendments, are generally consistent with those set forth in the SEC’s Regulation Best Interest (Reg. BI) and Interpretation of Conduct for Investment Advisers for advice to retail customers on securities. Therefore, broker-dealers and investment advisers that have already adopted compliance with Reg. BI or the fiduciary obligations under the Advisers Act should be able to adapt easily to the amended PTE.

Changes to PTEs

Finalized changes to PTE 2020-02 include coverage of pure robo-advice, pooled plan providers, and non-bank custodians for HSAs, clarifications on disqualifications from using the PTE, and the requirement to self-report and pay excise taxes to the IRS for non-exempt PTs. Another change from the proposal narrows when rollover disclosures are required. As amended, PTE 2020-02 only requires rollover disclosures for rollover recommendations from an ERISA Title I retirement plan and recommendations as to the post-rollover investment of assets currently held in a Title I plan. Rollover disclosures will no longer be required for advice to roll over from one IRA to another IRA or to change account type. The DOL notes, however, that advisors still have fiduciary care and loyalty obligations to make prudent efforts to obtain information about fees and investment options, and that demonstrating compliance will likely be difficult without documenting the basis for such recommendations.

PTE 84-24, as amended, does not require insurance companies to assume fiduciary status with respect to independent insurance agents.

Next Steps

The 2024 final rule and PTE package are scheduled to take effect September 23, 2024, with a one-year transition period for complying with the changes to PTE 2020-02 and PTE 84-24. During this time, investment advice fiduciaries must comply with the Impartial Conduct Standards and provide a written acknowledgment of fiduciary status.

The DOL has been attempting to update its fiduciary rules for years without longstanding success. While there are many supporters of these efforts to update the rules and protect retirement investors from advisors making recommendations based on their own financial interests, there are many stakeholders in the industry who are opposed to these changes for being too broad and the potential for making investment advice more expensive and less accessible for retirement investors because of additional compliance costs. Lawsuits seeking to delay the effective date or vacate all or parts of the rule/PTE package are expected.

As always, IRALOGIX continues to attentively monitor this regulation. Our platform and procedures will continue to assist our clients in navigating these regulatory requirements with minimal disruptions to their operations. We will provide further updates in the months ahead.

Dave Bernard steps down; board appoints Peter de Silva to lead company into its next growth phase

IRALOGIX, a leading retirement industry fintech provider, today announced that Dave Bernard stepped down as chief executive officer effective immediately. The board has appointed Peter de Silva as the new CEO of IRALOGIX. de Silva has been an IRALOGIX investor and board member for the past two years. He is a nationally recognized and highly accomplished financial industry executive.

“On behalf of the board, I want to thank Dave and the IRALOGIX team for the great job they have done in leading the company from a fledging startup to a truly disruptive force in the retirement market,” says Jim Smith, an IRALOGIX board member. “During his tenure Dave has been instrumental in not only building out a great product and a cutting-edge technology platform, but also assembling a very talented group of employees and senior leaders.”

de Silva assumes the reins at a critical juncture in IRALOGIX’s history as it continues to mature as a company. Last fall’s successful capital raise allows IRALOGIX to capture the significant growth opportunities ahead. de Silva has more than 35 years experience leading established companies in the financial services industry, including roles as president of TD Ameritrade’s retail business, president of Scottrade Financial Services, CEO of UMB Bank, and 17 years of experience at Fidelity Investments in various leadership roles.

“This is a really exciting time for IRALOGIX, its employees, and clients,” says de Silva. “We’ve had tremendous success helping to redefine and in many cases disrupt the wealth industry beginning with IRAs . My objective is to continue our innovative heritage, while speeding up our growth trajectory, scaling our business, and expanding our client base and distribution channels. I am thrilled to be given this opportunity to lead IRALOGIX as it enters its next lifecycle and to help solidify our mission of transforming the retirement experience for every investor in America.”

IRALOGIX enables institutional partners to rapidly launch profitable white-label IRA programs that leverage institutionally priced investments as well as professional advice and education. The company’s modular technologies are cloud-native and support a fully paperless process with no account minimums.

IRALOGIX recognized by FinTech Global as one of their WealthTech 100 companies for 2024.

Complementary accumulation and decumulation tools target retirement security for all

IRALOGIX, a leading retirement industry fintech provider, today announced a partnership with PensionPlus, an innovative decumulation solution that makes it easy for retirement plan participants to create a highly personalized retirement plan designed to last for their entire lives while keeping their current investments.

According to industry leader and PensionPlus CEO Shlomo Benartzi, “Collaborating with IRALOGIX will allow PensionPlus to further its goal of democratizing retirement income planning for all participants, including the tens of millions of Americans relying on IRA accounts.”

“We are honored to partner with Shlomo Benartzi and his team at PensionPlus as we integrate the most advanced post-retirement drawdown solution with the power of IRALOGIX’s groundbreaking IRA technology,” said David Bernard, Chief Executive Officer at IRALOGIX. “Together, we are creating fundamental change across the IRA and Wealth Management industries on behalf of every investor and all those who support them. PensionPlus gives IRA investors total control over their retirement savings and the opportunity to customize their retirement ‘paycheck’ for their specific needs.”

In 2024, 11,000 Americans are expected to celebrate their 65th birthday daily. Many struggle to convert their savings into a retirement paycheck that lasts the rest of their lives. Others are concerned about adhering to their income plan once in retirement and ensuring they don’t outlive their savings. Americans need a new and better way to create a personalized plan that matches their goals and preferences.

With PensionPlus, the benefits are clear: participants get a sustainable retirement paycheck while remaining in complete control of their investments (no transfer of assets required). In addition, PensionPlus monitors the plan (including spending and withdrawals) and adjusts the plan as needed based on portfolio performance and inflation. Additional features include an annual bonus payment and tax optimization. By creating an easy and affordable lifelong solution, PensionPlus aims to give all Americans the peace of mind they deserve in retirement.