The U.S. Department of Labor (DOL) on April 23, 2024, issued the Retirement Security Rule (the Final Rule), which expands who qualifies as an investment advice fiduciary for purposes of the Employee Retirement Income Security Act (ERISA). Additionally, the DOL released final amendments to several prohibited transaction class exemptions (PTEs) available to investment advice fiduciaries, which, together with the Final Rule, expand the fiduciary requirements under ERISA that require investment advice providers to offer prudent, loyal and honest advice to "retirement investors." Retirement investors include plan fiduciaries, plan participants or beneficiaries, retirement plans (including 401(k) plans), individual retirement accounts (IRAs), IRA owners or beneficiaries, and IRA fiduciaries. The Final Rule and amended PTEs will become effective on Sept. 23, 2024, with some transition relief provided with respect to the amended PTEs.
Background
ERISA imposes important requirements on fiduciaries of certain employee benefit plans, such as 401(k) plans, pension plans and other types of retirement savings plans. The ERISA fiduciary rules were implemented to ensure that fiduciaries offer advice that is solely in the best interests of retirement investors by maintaining the duty of prudence and loyalty to the retirement investors. The DOL emphasized that the Final Rule is important because most retirement investors rely on the advice of investment professionals, such as brokers, insurance agents and registered investment advisers, to invest their retirement savings. However, under the ERISA fiduciary rules currently in effect, there is a plethora of investment professionals who are not subject to ERISA's fiduciary safeguards. The DOL indicated that the Final Rule and amended PTEs will close the loopholes that permitted certain investment professionals to avoid ERISA's fiduciary standards.
New 3-Part Test for Investment Advice Fiduciary
The Final Rule has changed the five-part test that was previously used to determine whether a person is an investment advice fiduciary and as a result subject to ERISA's fiduciary standards. The DOL removed the requirement that investment advice must be provided on a "regular basis" and pursuant to "a mutual agreement, arrangement, or understanding" that the advice would serve as "a primary basis for investment decisions" in order to create a fiduciary relationship. Under the Final Rule, a financial services provider will be an investment advice fiduciary under ERISA if it satisfies the following three-part test:
- the provider makes an investment recommendation to a retirement investor
- the recommendation is provided for a fee or other compensation, such as commissions
- the financial services provider holds itself out as a trusted
adviser by:
- specifically stating that it is acting as a fiduciary under Title I or II of ERISA, or
- making the recommendation in a way that would indicate to a reasonable investor that it is acting as a trusted adviser making individualized recommendations in the investor's best interest
Notably, the DOL has closed the loophole for one-time advice, such that financial services providers that satisfy the above three-part test will be subject to ERISA's fiduciary standard even if they are providing one-time advice.
Definition of Recommendation
Under the Final Rule, a "recommendation" is a communication that, based on its content, context and presentation, would reasonably be viewed as a suggestion that the retirement investor engage in or refrain from taking a particular course of action. Whether a communication is a recommendation turns on the facts and circumstances of a particular communication, and the DOL has indicated that the more individually tailored the communication is to a specific customer or targeted group of customers, the more likely the communication will be considered a recommendation. The Final Rule will cover recommendations addressing the following topics:
- the advisability of acquiring, holding, disposing of, or exchanging securities or other investment property or investment strategy, or how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred or distributed from the plan or IRA
- the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., account types such as brokerage versus advisory) or voting of proxies appurtenant to securities
- rolling over, transferring or distributing assets from a plan or IRA, including recommendations as to whether to engage in the transaction, the amount, form and destination of such a rollover, transfer or distribution
Amendments to PTEs
The DOL has finalized amendments to several PTEs to eliminate coverage of compensation arising from fiduciary investment advice. These amendments provide that all investment advice fiduciaries will have to rely on PTE 2020-02 or PTE 84-24 to receive compensation that otherwise would be prohibited.
Amendment to PTE 2020-02. PTE 2020-02 permits investment advice fiduciaries to receive compensation for their services that would otherwise be prohibited by law by satisfying the following requirements:
- provide written acknowledgement of fiduciary status
- provide written description of services and any material conflicts of interest
- comply with impartial conduct standards under which they must satisfy a duty of care and loyalty
- adopt policies and procedures to ensure compliance with impartial conduct standards
- document any rollover recommendation and provide an explanation of how the recommendation is in the retirement investor's best interest
- conduct an annual retrospective compliance review
The amended PTE 2020-02 broadens the exemption to encompass additional transactions and builds on the existing exemption conditions relating to disclosure, recordkeeping and ineligibility.
Amendment to PTE 84-24. PTE 84-24 addresses the challenges of overseeing investment recommendations by insurance agents who recommend annuities issued by more than one insurance company. In the amendment, a new section was added to provide relief for independent insurance agents who receive compensation that would otherwise be prohibited for investment advice transactions. Additionally, the insurance company selling its products through the independent insurance agent is not treated as a fiduciary due to its oversight responsibilities regarding independent agents. However, the independent insurance agent is obligated to acknowledge its fiduciary status, and the insurance company must exercise supervisory authority over the independent agent.
Takeaways
The Final Rule expands the types of financial services providers who will be considered investment advice fiduciaries such that many providers will now need to comply with the fiduciary requirements under ERISA and the amended PTEs in order to receive compensation for their investment advice. The Final Rule and amendments to the PTEs are effective Sept. 23, 2024, and will apply to investment advice provided on or after that date. The amended PTEs also include a one-year transition period.
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