On April 25, 2024, the Department of Labor (DOL) published the retirement security final rule defining fiduciary status for investment advice to retirement investors under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). It is set to go into effect on September 23, 2024. The DOL’s final definition of an investment advice fiduciary expands fiduciary duties to more retirement-related recommendations, including rollovers out of employer-sponsored defined contribution plans into annuities and individual retirement accounts (IRAs). The DOL also released final amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries, which is beyond the scope of this blog.

While the new rule is expected to have a greater impact on financial services providers, experts say the rule provides protections to retirement plan sponsors when receiving investment recommendations from professionals. They say plan sponsors should pay attention to provisions regarding investment advice fiduciaries as well as how to distinguish between education and recommendation, monitor service providers and provide retirement education.

Who is a fiduciary now under the 2024 final rule?

The DOL fact sheet explains that the final rule provides that a financial services provider will be an investment advice fiduciary under federal pension law if:

• The provider makes an investment recommendation to a retirement investor
• The recommendation is provided for a fee or other compensation
• The provider holds itself out as a trusted advisor by specifically stating that it is acting as a fiduciary under Title I or II of ERISA or meets the “regular basis” test which is making the recommendation in a way that would indicate to a reasonable investor that it is acting as a trusted advisor making individualized recommendations based on the investor’s best interest.

What is the regular basis test under the final rule?

As also described in the DOL fact sheet, the investment professional meets this “regular basis” test with respect to a compensated recommendation if the provider “makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation:

• Is based on review of the retirement investor’s particular needs or individual circumstances
• Reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances
• May be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.”

How is the finalized regular basis test different from the proposal? This provision is one of few that the DOL changed from the proposal. The final rule added that the recommendation reflects the application of “professional or expert judgment.” Restricting a regular basis fiduciary to someone who provides professional or expert judgment “should help clarify that most normal actions by a TPA or HR professional of the employer do not result in fiduciary status,” Kelsey Mayo wrote on NAPA.

What’s required of investment advice fiduciaries?

The rule and amended PTEs will protect retirement investors by requiring trusted advice providers to follow high standards of care and loyalty when they make investment recommendations, the DOL fact sheet states. Under the final rule, trusted advisors will have 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
• Give the retirement investor basic information about the advisor’s conflicts of interest.

Who is a retirement investor?

The final rule provides that a retirement investor can be a plan, plan participant or beneficiary, IRA, IRA owner or beneficiary, or plan fiduciary with discretionary authority within the meaning of ERISA section (3)(21)(A)(i) or (iii). In other words, plan sponsors are retirement investors. The rule applies when trusted financial services providers give compensated investment advice to plan officials responsible for administering plans and managing their assets.

The DOL officials “wanted to make sure that . . . if [plan sponsors] are going out to get investment recommendations that they understand, no matter what type of professional they’re going to and what type of investment vehicle is being discussed, that all of them will be protected under this rule,” Lisa Gomez, assistant secretary for employee benefits security administration, said at the PLANSPONSOR National Conference according to this recap. 

What is a recommendation?

A recommendation is not defined. Rather, it is characterized as a “call to action” according to the preamble:

In general, for purposes of the final rule, the line between an investment recommendation and investment education or information will depend on whether there is a call to action. Thus, many of the types of information cited by commenters as important to retirement investors could be provided under the final rule without the imposition of fiduciary status. For example, like the SEC in Regulation Best Interest, the Department believes that “a general conversation about retirement planning, such as providing a company’s retirement plan options” to a retirement investor, would not rise to the level of a recommendation.

Investment education and retirement education are not considered recommendations.

Highlights from the preamble on how to address investment and retirement education are as follows.

• “The rule makes clear that mere investment information or education, without an investment recommendation, is not treated as fiduciary advice.”
• “The Department agrees that it is important that retirement investors continue to have access to information about the options available to them regarding rolling over, transferring or distributing retirement assets and that these discussions can be purely educational.”
• “The Department confirms thatfurnishing the categories of investment-related information and materials described in the ‘Investment Education’ provision in the 2016 Final Rule would not result in the provision of fiduciary investment advice under the final rule. The provision in the 2016 Final Rule included, for example, information on ‘[g]eneral methods and strategies for managing assets in retirement (e.g., systemic withdrawal payments, annuitization, guaranteed minimum withdrawal benefits).’’’

“A key to knowing where the line is between education and recommendation is the individualization of the information. The more individualized the communication, the more likely it is a recommendation,” Fred Reish, partner at Faegre Drinker, wrote.

Rollover Recommendations

The final rule closes the loophole for one-time advice by establishing that a financial services provider will be a fiduciary with respect to a recommendation to roll over assets from a workplace retirement plan to an IRA if every element of the fiduciary definition is satisfied, the fact sheet said. The DOL intended the final rule to cover one-time advice because rollovers are a type of interaction that retirement investors commonly have with trusted advisors in the financial services marketplace today, which wasn’t the case fifty years ago. “The current definition of investment advice fiduciary, adopted in 1975, was written when individual retirement accounts were less common and before 401(k) plans existed. Most people relied on traditional pensions for retirement security. Today, individual plan participants and IRA owners—not professional money managers—are expected to make important, complex financial decisions, and they seek help from expert advisors, which made updating this rule necessary,” a news release said.

Key Plan Sponsor Actions: Selecting and Monitoring Service Providers

Plan sponsors as fiduciaries to the plan maintain the same responsibilities to prudently select and monitor service providers, act solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them, and pay reasonable plan expenses. In addition, experts told Christopher Carosa in a Fiduciary News article titled “The Impact Of New Fiduciary Rule On 401k Plan Sponsors” to consider the following.

• “Some service providers already confirm, in writing, that they are ERISA fiduciaries,” says Jack Towarnicky, of counsel at Koehler Fitzgerald, LLC. “Sometimes it is difficult to draw the line where education leaks into advice. So, plan sponsors should review/re-examine/re-evaluate service provider actions/materials in delivering investment education, and given the Retirement Security Rule’s focus on rollovers, any service provider actions/materials regarding distributions.”
• “First and foremost, plan sponsors will need to more diligently assess and monitor their service providers to ensure they are complying with fiduciary standards. This means sponsors may need to revise their contracts and oversight processes to hold advisors and other service providers accountable for acting in the best interests of plan participants,” Brandy Burch, CEO and founder of Benefitbay, said.
• “Plan sponsors should evaluate their plan investment advice offerings including robo-advice services, plan rollover services, and any other investment advisor relationship that can come under this rule and determine any desired changes to be made to those services and contractual agreements,” says Michelle​​​​ Capezza, of counsel at Mintz.
• “A new due diligence question for plan sponsors should be to ask their plan advisor what steps they are taking to comply with the new Fiduciary Rule and the Prohibited Transactions Exemption,” said Jeff Coons, chief risk officer at High Probability Advisors. “Once these regulations take effect, plan sponsors may be able to feel a little more comfortable about the nature of the advice being delivered to their participants.”

In summation, plan sponsors should prepare by reviewing education materials and investment advisor relationships as well as asking service providers to disclose in writing if they are an ERISA fiduciary.

Legal Challenges

At least two lawsuits have been filed seeking to prevent the implementation of the final rule or asking a court to vacate the rulemaking package entirely. While litigation continues, plan sponsors and investment advice providers should continue to prepare for final implementation effective September 23, 2024. For more information on how this rule is affecting fiduciaries, register for the International Foundation webcast DOL Developments and Updates.

Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.