On October 31, the U.S. Department of Labor (DOL) released the highly anticipated proposed “fiduciary rule.” The Biden administration continued its theme of eliminating “junk fees”—as it has done previously with banking, concert tickets, and travel—in this instance addressing the cost of superfluous fees on Americans’ retirement savings.

The hundreds of pages that address the rule and related material are quite complex, but essentially they address the following issues:

• Who is a fiduciary
• What is a fiduciary
• How to apply fiduciary standards—both for investments generally and insurance/annuity products
• What your marketing materials can say
• What is “reasonable” compensation (i.e., addressing the junk fees)

Background of the Fiduciary Rule 2023

Each of the last three presidential administrations has attempted to update the definition of an “investment advice fiduciary.” The current rule was adopted in 1975 when, as noted by the DOL, the most common retirement benefit was a defined benefit (DB) pension plan in which the risk of an adequate benefit was managed by the plan sponsor, supported by expert advisers.

Since that time, defined contribution (DC) plans have become the predominant retirement benefit and make up the majority of Americans’ savings. In stark contrast to DB plans, the risk of poor investment performance or inadequate savings is borne by inexpert participants.

This proposed regulation seeks to apply the key fiduciary obligations outlined in the Employee Retirement Income Security Act (ERISA) to professional investment advisers. The regulation requires that any fiduciary adviser meet an expert standard of care (the duty of prudence), put the DC plan participant first (the duty of loyalty), and avoid conflicts of interest (the prohibited transaction rules).

An adviser who met any of the following requirements would qualify as an investment advice fiduciary:

• The adviser offers investment advice or a recommendation to a DC plan participant.
• The advice or recommendation is provided for a fee or other compensation.
• The recommendation is made in the context of a professional relationship in which an individual would reasonably expect to receive sound investment recommendations that are in his or her best interest.
• The provider described in the last bullet is defined as a party that has discretion over investment decisions for the participant. The provider makes investment recommendations regularly as part of its business, and the circumstances would indicate that the recommendation is tailored to the individual’s needs or circumstances—or states that the adviser is acting as a fiduciary.
• The proposed regulation contrasts with the nearly 50-year-old fiduciary rule, where a provider is an investment advice fiduciary only if, among other things, the advice is provided on a “regular basis” to a specific individual and there is a “a mutual agreement, arrangement, or understanding” that the advice will serve as “a primary basis for investment decisions.”

In 2016, the DOL finalized an updated investment advice fiduciary definition, granting new prohibited transaction exemptions (PTE) including the “Best Interest Contract Exemption,” and amended some pre-existing PTEs. However, a court struck down this rulemaking in 2018 as too broad and exceeding the DOL’s authority by requiring enforceable contracts and specified warranties. The new proposed rule seeks to avoid this outcome by more narrowly tailoring the scope to employer plans and does not impose any new contract or warranty requirements.

Finally, the DOL claims that the updated rule will level the playing field for advisers, applying consistent standards regardless of the products being recommended. The fiduciary duties would also apply to recommendations to roll over assets from a workplace retirement plan to an IRA.

Prohibited Transaction Exemptions

The DOL also proposed complementary amendments to existing PTEs, intending that individuals will receive the same quality investment advice, regardless of the product or service. The first exemption, based on PTE 2020-02, would be broadly available for advice on the universe of investments recommended to retirement investors. A second exemption amending PTE 84-24 would apply to independent insurance agents and is intended to facilitate their ability to make best interest recommendations under their business model.

Bottom Line

The release of this nearly 500-page proposed rule is not the end of this long-running saga. It will be updated following the comment period, which will last at least 60 days, and may be impacted by the outcome of the 2024 presidential election. In advance of the rule, plan sponsors should seek to understand the scope of the current relationships that may fall under these requirements. Future actions will be defined by the service providers, recordkeepers, and advice offerings.