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:
- Directly or indirectly (e.g., through or together with any affiliate) make professional investment recommendations regularly, as a part of their business
- 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
- 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.