The Department of Labor hosted a webinar last week to explain its final Retirement Security Rule defining who is an investment advice fiduciary for the purposes of ERISA.
Lisa Gomez, head of the DoL’s Employee Benefits Security Administration (EBSA) reiterated that the latest iteration of the fiduciary rule updates a 1975 rule that she said was well past due for a change. It was crafted nearly 50 years ago when 401(k) plans did not exist, individual retirement accounts were uncommon and retirement assets were concentrated in defined benefit plans that were managed by professional money managers.
“That’s not the world we live in today,” said Gomez. “Both the retirement landscape and the investment landscape have changed.”
Those who provide investment advice in today’s environment, including insurance agents, brokers, financial planners and registered investment advisors, often have significant conflicts of interest that must be carefully managed to protect investor interests, she said.
“These professionals have had no obligation under the 1975 rule to act in a retirement investor’s best interest, and that’s not right,” she said.
The final rule levels the playing field by requiring everyone to adhere to a best interest standard based on prudence and loyalty when providing investment advice, she said.
Final rule
The language of the final rule was largely the same as the language of the proposed rule released late last year. Ali Khawar, principal deputy assistant secretary for EBSA, and Timothy Hauser, deputy assistant secretary for program operations at EBSA, joined the webinar to provide an overview of the new rule and answer questions. Both Khawar and Hauser said public comments influenced a few changes in the final text of the rule.
The final rule provides that a financial services provider will be an investment advice fiduciary under federal pension law if:
- [1] “the provider makes an investment recommendation to a retirement investor;
- [2] the recommendation is provided for a fee or other compensation, such as commissions; and
- [3] the financial services provider holds itself out as a trusted adviser by specifically stating that it is acting as a fiduciary under Title I or II of ERISA; or making the recommendation in a way that would indicate to a reasonable investor that it is acting as a trusted adviser making individualized recommendations based on the investor’s best interest.”
The final rule notably eliminated a third criteria originally outlined under its fiduciary test surrounding discretion over assets, said Khawar.
According to EBSA, the rule and amended prohibited transaction exemptions (PTE) will protect retirement investors by requiring trusted advice providers to:
- Meet a professional standard of care when making recommendations (give prudent advice);
- Never put their financial interests ahead of the retirement investor’s when making recommendations (give loyal advice);
- Avoid misleading statements about conflicts of interest, fees, and investments;
- Charge no more than what is reasonable for their services; and
- Give the retirement investor basic information about the adviser’s conflicts of interest.
Intermediaries and wholesalers
Khawar said the agency received substantial feedback about the categorization of investment professionals who are interacting with professional advisors rather than plan sponsors and participants by providing models and tools that help them provide advice. The proposed rule would have applied a fiduciary standard to these professionals, but the final rule removed intermediaries and wholesalers from the definition of retirement advisor for the purposes of fiduciary requirements.
Exemptions
The department also addressed several existing exemptions to ensure all retirement investors receive the same quality investment advice. The final rule outlines two administrative exemptions available for managing conflicts of interest:
- PTE 2020-02 allows investment advice fiduciaries to receive compensation that would otherwise be prohibited as long as the fiduciaries meet the care and loyalty obligations outlined in the law and ensure that retirement investors receive prudent and loyal advice.
- PTE 84-24 refers to investment recommendations by independent insurance agents who recommend annuities issued by more than one insurance company. A new section is added requiring the independent insurance agent to acknowledge its fiduciary status, and the insurance company is required to exercise supervisory authority over the independent agent with regard to an agent’s recommendation of the insurance company’s own products.
Finally, amendments to other PTEs remove fiduciary investment advice transactions from the covered transactions in each exemption and make other administrative changes. These changes essentially level the playing field by requiring all investment advice fiduciaries to rely on PTE 2020-02 or PTE 84-24 to receive compensation that would otherwise be prohibited.
Timelines
The department also lengthened its implementation timeline, which originally was 60 days in the proposed rule. The final rule provides 150 days for implementation starting with publication of the final rule on April 25 in the Federal Register, making the rule effective on September 23, 2024. However, the department added a one-year phase-in period for certain conditions of the amended PTEs.