The definition of a fiduciary under ERISA, a rule originally written in 1975, has fluctuated in the past decade. Fiduciary investment advice rules have had a long history filled with ups, downs and mixed support. On October 31, 2023, the U.S. Department of Labor (DOL) released a proposal that would hold many people who are recommending investments to retirement plan sponsors and participants to a higher standard than before. The proposed rule package is titled, “Retirement Security Rule: Definition of an Investment Advice Fiduciary.”

DOL intends to protect participants who need individualized investment advice increasingly more than in 1975, when pension plans were more common. Participants in workplace retirement plans like 401(k) plans, individual retirement accounts (IRAs) and those purchasing an annuity with their workplace retirement plan assets might seek one-time individual investment advice. Plan sponsors need to know that this proposal would broaden the definition of an investment recommendation to cover advice to plan participants who transfer money out of workplace retirement plans, if certain criteria are met.

DOL also proposed changes to several existing exemptions intended to ensure all retirement investors receive the same quality investment advice, regardless of the product or service they receive. DOL’s fact sheet describes the proposed prohibited transaction exemption changes.

This blog highlights the proposed definitions of fiduciary and investment recommendations as well as what conditions an investment advice fiduciary would need to follow.

Current status of proposed fiduciary definition: As of January 16, 2024, DOL is reviewing public comments about the proposal. Following that, DOL will justify decisions to finalize, change or withdraw proposed rules.

No immediate impact on plan sponsors: Plan sponsors can make themselves aware of possible changes, but many roadblocks are in the way of predicting what the final rule will say and if it will survive legal challenges. A major disagreement is whether DOL has overstepped its authority in making rules for IRAs. Some retirement industry groups and members of Congress have called for the proposal to be withdrawn. What will happen and when is unpredictable.

Aren’t financial services providers already fiduciaries?

It depends. Some financial services providers are subject to securities regulations or state laws specific to rollovers and single recommendations. SEC Regulation Best Interest considers rollover advice a fiduciary act.The National Association of Insurance Commissioners (NAIC) model regulation says a single recommendation can be subject to NAIC state best interest standard of care for annuities. More than 40 states have adopted updated conduct standards for insurance agents and companies recommending annuities based on this.

Under the 1975 ERISA rules,a financial services provider is an investment advice fiduciary only if, among other things, the advice is provided on a “regular basis” and there is a “a mutual agreement, arrangement, or understanding” that the advice will serve as “a primary basis for investment decisions.” As a result, advice that is provided on a one-time basis is typically not treated as fiduciary advice. DOL listed the following examples as “one-time basis” advice where the financial services provider would likely not be treated as a fiduciary under the 1975 rule:

• Rollover recommendation
• Recommendation to liquidate a lifetime of savings in an ERISA-covered plan and purchase an annuity
• Advice to a terminating defined benefit pension plan on the purchase of a group annuity contract to cover all the benefits promised to all the plan’s participants for the rest of their lives.

Therefore, DOL identified advice on a one-time basis as an area that investors need more protection that would be covered under the proposed rule.

Proposed definition of a fiduciary

Under the proposed rule, a financial services provider would be an investment advice fiduciary under ERISA if:

• The provider provides investment advice or makes an investment recommendation to a retirement investor
• The advice or recommendation is provided for a fee or other compensation, and
• The financial services provider makes the recommendation in the context of a professional relationship in which an investor would reasonably expect to receive sound investment recommendations that are in their best interest. This includes scenarios where:
  • The provider has discretion over investment decisions for the retirement investor;
  • The provider makes investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest; or
  • The provider states that they are acting as a fiduciary when making investment recommendations.

DOL believes that in each of these contexts, the retirement investor can and should reasonably place trust and confidence in the financial services provider, and it is appropriate for the provider to be held to a fiduciary standard.

Proposed definitions of investment recommendations

If every element of the proposed fiduciary definition is satisfied, then the ERISA fiduciary standard would apply to:

• Recommendations to roll over assets from a workplace retirement plan to an IRA or annuity
• Recommendations to transfer money among retirement accounts or change an account type. Retirement accounts could be employer plan (plan) to plan, plan to IRA, IRA to plan or IRA to IRA.
• Recommended distributions. Taking money out of an ERISA-protected account is a type of transfer.

What would the proposed retirement security rule do?

The proposed rule explains the conditions that advice providers who are acting in a fiduciary role under federal pension laws must follow to protect retirement investors.

Under these proposals, investment advice fiduciaries would:

• Give advice that is prudent and loyal
• Avoid misleading statements about conflicts of interest, fees and investments
• Follow policies and procedures designed to ensure the advice given is in an investor’s best interest
• Charge no more than is reasonable for their services
• Give investors basic information about any conflicts of interest.

To learn more

The financial services provider recommendations that would be considered fiduciary advice under this proposal are broad. Most transactions that involve a recommendation with a workplace retirement plan, plan participant or an IRA would be held to an ERISA fiduciary standard if the rule is finalized as proposed. You can find more background information and the latest developments with the Fiduciary Investment Advice InfoQuick.

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