The Department of Labor (DOL) recently released the Retirement Security Rule - yet another iteration of its updated fiduciary rule that has been kicking around the agency for over a decade. The final rule updates the definition of investment advice fiduciary under ERISA and will generally be effective September 23, 2024, with a delayed compliance date of one year for a portion of the amended Prohibited Transaction Exemptions (PTEs) 2020-02 and 84-24. During the one-year phase-in period, investment professionals may rely on PTE 2020-02 to receive compensation for their advice if they comply with the “Impartial Conduct Standards” and the written acknowledgment of fiduciary status requirement found in the PTE. 

Revised Definition of Fiduciary Investment Advice

The final rule takes another stab at defining when a financial service provider will be an investment advice fiduciary under ERISA in a way that the agency hopes will finally pass judicial scrutiny since the first lawsuits have already been filed challenging the new rule.  Accordingly, as noted on the DOL’s website, advisors are investment advice fiduciaries under ERISA if they (1) make a recommendation for a fee or other compensation to an employee benefit plan, a plan participant or beneficiary, an IRA or its owner or beneficiary, or a plan or IRA fiduciary with authority or control over the plan or IRA; AND (2) do one of the following: (a) acknowledge that they are acting as a fiduciary under ERISA or (b) make a professional recommendation to investors on a regular basis as part of their business, and the circumstances indicate that the recommendation reflects professional judgment, applies to the retirement investor’s financial circumstances, and may be relied upon to advance the investor’s vested interest.

The new definition is intended to close the perceived “loophole” for one-time advice that has previously kept most retirement plan to IRA rollover advice divorced from the fiduciary standards of ERISA.

Coordination with Securities and Exchange Commission (SEC)

While many commentators have voiced the opinion that more regulation is not needed in this space in light of the SEC’s efforts to strengthen investor protections through its recent rule making, the DOL has stated that it took the SEC’s efforts into consideration and believes that the new rule is in alignment with the SEC’s Regulation Best Interest and the Investment Advisor’s Act. For example, the rule replaces the concept of “best interest standard” with “care obligation” and “loyalty obligation,” which the DOL believes is more consistent with Regulation Best Interest.

Prohibited Transaction Exemptions

In addition to adopting the final rule, the DOL amended PTEs 2020-02, 84-24, 75-1, 77-4, 80-83, 83-1 and 86-128. As a result, investment advice fiduciaries must rely on PTE 2020-02 or 84-24 to receive compensation for their advice.

• PTE 2020-02 is broadly available for advice with respect to the wide universe of investments recommended to retirement investors.
• PTE 84-24 is tailored for use by independent insurance agents and is intended to facilitate their ability to make best interest recommendations under their business model.

The amendments to the other PTEs remove fiduciary investment advice transactions from the covered transactions in each exemption and make other administrative changes so that investment advice fiduciaries may only use PTE 2020-02 or 84-24 to receive compensation for investment advice.

What Do Financial Service Providers Need to Know?

Here are some highlights from the final rule and PTE amendments:

• A disclaimer will not control, to the extent it is inconsistent with the advisor’s oral or other written communications, marketing materials or other interaction with the client. Thus, advisors cannot generally avoid fiduciary status through disclaimers that are at odds with their other communications with the retirement investor.

• If you currently rely on PTE 2020-02, you will need to update your disclosures. PTE 2020-02 will now require, among other things, a fiduciary acknowledgment, additional disclosures such as a written statement of the “care obligation” and “loyalty obligation” standard and additional disclosures about fees, scope of services, and conflicts of interest. The DOL has provided a model disclosure on page 12 of the amended PTE 2020-02.
• You will also need to review your policies and procedures to insure they comply with the Impartial Conduct Standards found in several of the PTEs which provide guidance to mitigate conflicts of interest.

• Under the new rule, more financial service providers who work with retirement funds will be deemed to be investment advice fiduciaries and will need to complete the requirements to satisfy PTE 2020-02.

On the Helpful Side:

• Advisors will no longer be required to provide cost comparisons and rollover specific documentation for an investor to roll over his or her account from one IRA to another IRA or to change account type. The cost comparison and rollover specific documentation will still be required for a roll over from a plan to an IRA.
• Advisors will no longer be required to report self-corrections to the DOL for violations of PTE 2020-02. Also, there will be a 30-day correction period for disclosing errors in certain circumstances.
• While the prior version of PTE 2020-02 could be used for certain principal transactions that were defined as “covered principal transactions” and “riskless principal transactions,” the amended version will now apply to all transactions pursuant to which a financial institution, investment professional, or its affiliate provides investment advice, regardless of whether they are executed on a principal or agent basis. However, PTE 2020-02 generally does not apply in transactions where the investment professional or financial institution is acting in a capacity other than as an investment advice fiduciary.
• Robo-advice will be covered under PTE 2020-02.

As noted, judicial challenges to the final rule have already begun. While financial service providers may be tempted to take a “wait and see” approach to compliance with the final rule in light of these lawsuits, it is important that they at least take stock of where they are with respect to potential 2024 compliance requirements. The one-year phase-in period will allow them some time to more fully review and update disclosures and policies and procedures, and to implement related training.

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