• On April 23, 2024, the Department of Labor (DOL) announced updates to the investment advice fiduciary regulation, which it calls the “Retirement Security Rule.”
  • The new rule is designed to address transparency and conflicts of interest around distribution, rollover, and investment advice for retirement investors.
  • It will cause many more financial professionals and a broader range of transactions to fall under the ERISA fiduciary umbrella.
  • The DOL also amended associated Prohibited Transaction Exemptions (PTEs) that apply to conflicted advice and rollover recommendations.
  • The new rule and PTE amendments generally take effect on September 23, 2024, although a subsequent one-year transition period will delay the effective date of certain conditions to 2025.

Federal courts have described fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA) as the “highest known to law.” On April 23, 2024, the DOL announced updates to the investment advice fiduciary regulation (formally known as the Retirement Security Rule), which brings many more financial professionals under the ERISA fiduciary umbrella. The determination of whether a financial professional is acting as an ERISA fiduciary and subject to this high standard depends on whether that professional is giving “investment advice.”  

It can be complicated to determine whether one is rendering investment advice. The DOL (and the courts) have been wrestling with this since the DOL introduced the first version of the so-called “fiduciary rule” in 2010. However, the determination – and the corresponding fiduciary status – is consequential for financial professionals, employer-sponsored plans, and investors. The new rule and PTE exemptions are designed to address the restrictions and required procedures imposed on an investment advice fiduciary, as well as ensure that the interests of investors (or plan participants) come first. 

Regulatory Background

Under ERISA Section 3(21), there are three ways to become a fiduciary, one of which is by giving investment advice for a fee. In 1975, the DOL established the test for investment advice as a five-part test (Five-Part Test) that required the presence of all five parts. Over time, the DOL began to consider one of those parts – the requirement that advice be provided on a regular basis – to be outdated. The DOL first attempted an update to this framework in 2010 as a proposed regulation. It did not publish a final version of that regulation until 2016, which the Fifth Circuit Court of Appeals ultimately vacated in 2018 because of a lawsuit by industry groups and the Chamber of Commerce. After the Five-Part Test was resurrected, the DOL implemented a PTE in 2020, which sought to reinterpret the Five-Part Test as well as provide financial professionals with an exemption procedure to cure any alleged conflicts that arise when an advisor benefits from providing investment advice in exchange for a fee. This PTE was also challenged in the courts with some success in narrowing the DOL’s efforts. On October 31, 2023, the DOL proposed the Retirement Security Rule, followed by congressional hearings, a comment period and the publication of the final regulation on April 23, 2024 (Final Rule).  

Retirement Security Rule

The Final Rule has three major categories of changes:

  • A new regulation that redefines who may become a fiduciary under ERISA when a financial professional provides advice with regard to a plan or an individual retirement account (IRA) by removing the Five-Part Test and introducing a new test for investment advice.
  • Updates to two administrative exemptions (or PTEs): (1) PTE 2020-02, which is broadly made available for conflicted advice arrangements, and (2) PTE 84-24, which is similar to PTE 2020-02, but which is narrowly tailored to independent insurance agents.
  • Amendments to a group of other PTEs that would prohibit their previously allowed use in fiduciary investment advice transactions.  

Investment Advice

The Final Rule seeks to include more ERISA fiduciaries as the DOL believes the Five-Part Test was “underinclusive in assigning fiduciary status” because it doesn’t include many circumstances when “an investor would reasonably expect that they can place their trust and confidence” in the financial professional. 

Recommendations. Many of the concepts in the Final Rule may seem familiar. The DOL identified efforts to coordinate with other regulators including the Securities and Exchange Commission (SEC); the determination of a recommendation is aligned with the SEC’s “best interest” framework and based on whether there is a call to action.

The DOL provided helpful, practical examples, such as:

  1. A general conversation about retirement planning should not constitute a recommendation, as recommendations are distinguishable from education
  2. Examples of education include information about plan information, general financial and investment information, asset allocation models, and interactive investment materials, among other forms of education.
  3. Explaining that the plan has target date funds is education.
  4. However, once it is suggested that based on the participant’s risk profile, that individual should invest in the target date funds, then advice is delivered (so long as the other elements of the Final Rule are met).

Retirement Investor. The Final Rule defines a retirement investor, which includes the plan, participants, beneficiaries, IRAs, IRA owners and beneficiaries and plan fiduciaries with discretionary authority. Health savings accounts (HSAs) are also now included under the umbrella of retirement investors. Although some commentors requested a “sophisticated advice recipient” exception to the definition of retirement investor, the Final Rule does not include one.  

Special Considerations. The test for determining fiduciary status remains functional and is based on the financial professional’s actions. While the DOL acknowledges that disclaimers may be made, those disclaimers must be consistent with the actions of the financial professional. The DOL addressed whether specific examples would or would not be considered advice under the Final Rule, such as:

o   Not advice: Marketing and sales conversations (including “hire me” conversations), such as those with plan fiduciaries, IRA owners, and other financial professionals.

o   Not advice: Plan sponsors communicating with participants would not be advice. This may have been the ultimate result under the proposed rule because it would not be provided by a financial professional or for a fee, but the Final Rule makes this outcome clear.

o   Potentially advice: Platform providers that provide “individualized recommendations to a plan on the construction of a prudent fund lineup” could be considered to provide fiduciary investment advice if the other elements of the Final Rule are met.

PTE 2020-02 and PTE 84-24

PTE 2020-02 allows financial professionals to receive compensation that would otherwise not be allowed if the financial professional does not comply with the conditions of the exemption; PTE 84-24 does the same specifically for independent insurance agents. The conditions for both include:

  • Advice provided under the care obligation, meaning it must meet a professional standard of care as specified in the respective exemptions.
  • Advice provided under the loyalty obligation, meaning financial professionals do not place their own interests ahead of the interests of the retirement investor. Coupled together, the care obligation and loyalty obligation are known as the “Impartial Conduct Standards.”
  • The financial professional and their firm must charge no more than reasonable compensation and comply with best execution requirements.
  • Advice provided cannot include misleading statements.  

Although there are some changes from the proposed PTE modifications – particularly for PTE 84-24 – largely, the final PTEs remain similar. For example, rollover transactions will continue to be considered as “conflicted advice”, but PTE 2020-02 will remain the proper exemption under which to effectuate rollover transactions, provided that the corresponding conditions are met. 

Call to Action

The consistent themes from the DOL’s fiduciary rulemaking from 2010 to the present have been an expansion of financial professionals considered to be ERISA fiduciaries and an expansion of the retirement investors (now including IRA and HSA account holders) protected by the Final Rule. With the DOL having finalized a new rule intended to accomplish those two levels of expansion:

  • Financial professionals should review the Final Rule and determine how it applies to their business or situation. They should take special care to consider whether the Final Rule will cause specific types of their recommendations – such as rollover or distribution recommendations – to be fiduciary investment advice.
  • Plan sponsors and fiduciaries should identify whether financial professionals interacting with a committee, trustees, or participants are serving in a fiduciary or non-fiduciary role for certain activities and understand how that might change with the Final Rule.
  • Plan sponsors and fiduciaries should also explore whether to implement a process for monitoring the financial professionals who interact with their participants and to understand whether their interactions may evolve from a non-fiduciary to fiduciary character in the future.
  • Investors should be prepared for financial professionals to seek more contextual information that will help to justify whether recommendations are prudent and in investors’ best interests, as well as a stronger system for financial professionals’ documentation of their advice and supporting rationale.

The Final Rule and PTEs generally take effect on September 23, 2024, although there is a one-year transition period after the effective date for certain conditions that don’t commence until 2025. In the interim, many anticipate litigation challenges to the Final Rule. The DOL went to great lengths to address the potential for litigation in the preamble to the Final Rule by distinguishing it from the vacated 2016 version of the rule in many instances. We will continue to monitor these developments and also anticipate that there may be additional DOL guidance in future months.   

The final Retirement Security Rule | J.P. Morgan Asset Management (jpmorgan.com)

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