On April 23, 2024, the U.S. Department of Labor (DOL) released the Retirement Security Rule defining who is an investment advice fiduciary for purposes of complying with the Employee Retirement Income Security Act of 1974 (ERISA).
In its 2024 release, the DOL also released final amendments to several class prohibited transaction exemptions (PTEs), which exist to accommodate financial services firms and their representatives working with retirement investors.
The Retirement Security Rule revises the DOL’s former 2016 Fiduciary Rule, which was vacated by court order in 2018.
ERISA Plans and Fiduciary Standards
In 1974, Congress enacted the Employee Retirement Income Security Act—more commonly known as ERISA—to safeguard the interests of participants in private-sector employer-sponsored retirement and health benefit plans. ERISA established standards of conduct for those who exercise control over such plans and provide advice about their asset investments—that is, plan fiduciaries.
In broad terms, a fiduciary is a person or entity that has the power and duty to act for another, under circumstances that require the utmost good faith, trust, and honesty. Generally considered to be the highest standards of conduct under the law, fiduciary duties require one to act and serve solely on behalf of another party, that is, in that other party’s best interest.
Why did DOL determine the Rule was needed?
In the 50 years since enactment of ERISA, the retirement plan landscape has changed dramatically, leading to the DOL’s efforts to expand the types of retirement investment advice that would invoke a fiduciary duty.
The two most notable changes are the shift from defined benefits to defined contribution plans and the growth of IRAs. IRAs were introduced with ERISA, and 401(k) plans did not yet exist until 1981—7 years after enactment of ERISA. As a result, the rules governing retirement plans were designed mainly with employer pension plans in mind. In fact, ERISA was primarily aimed at “assuring the equitable character” and “financial soundness” of defined benefit pension plans.
The shift from employer-funded pensions to participant-driven plans (including 401k plans) require participants to make important financial decisions, which many individuals are unprepared to manage without a financial professional’s advice. The Retirement Security Rule is intended to protect these individuals from investment advice that may be driven, among other things, by conflicts of interest on the part of advisors.
What does the 2024 Retirement Security Rule change?
Shortly after enacting ERISA, the DOL issued a regulation seeking to define “fiduciary investment advice.” The earlier rules created a 5-part test and, notably, exempted advice that was not given to a client on a “regular basis.”
However, with the change in the retirement planning landscape, the “regular basis” point created a so-called loophole for many.
For example, advising someone to transfer 401(k) assets into a rollover following a job change is often the only interaction a financial adviser might have with an individual. Such advice is considered “one-time” advice, and since advice is not given to the individual on a regular basis, the transaction would not be subject to fiduciary standards. Instead, the lower-bar “suitability standard” would apply.
Importantly, the Retirement Security Rule removes the 5-part test and instead defines fiduciary investment advice “according to the nature—rather than the frequency” of advice provided.
Who is a Fiduciary under the 2024 Retirement Security Rule?
Whether a person will be considered an investment advice fiduciary under ERISA does not depend on their licensing status, product portfolio, company affiliation, or firm structure. Rather, it depends on the nature of the advice and recommendations provided.
Insurance agents, brokers, and other types of advisers fall under ERISA’s new fiduciary umbrella if their recommendations relate to a qualified retirement plan or IRA. If they recommend products for use in an IRA, for example, their advice and product recommendations would be subject to the Retirement Security Rule.
Insurance producers who are only licensed to sell fixed insurance and annuity products may find they are deemed fiduciaries based on the focus of their advice and recommendations. If they recommend a deferred fixed or variable annuity for use in an IRA, for example, their advice would be subject to the Retirement Security Rule and they would be held to a fiduciary standard.
What are PTEs and why are they important?
The release by the DOL of the Retirement Security Rule on April 23, 2024, was accompanied by release of amendments to prohibited transaction exemptions (PTEs) available to investment advice fiduciaries. As the name suggests, PTEs are exemptions to qualified plan transactions that would normally be prohibited under ERISA, some of which are common in the financial services world.
An example of a prohibited transaction under ERISA is a financial adviser’s receipt of commissions or advisory fees in a transaction that involves transferring a customer’s 401(k) plan assets to a Rollover IRA provided by the financial services company which the adviser represents, which may be considered a conflict of interest. Essentially then, PTEs provide advisors with a path to compliance while being compensated for their work.
Two PTEs, in particular, factor heavily in protecting financial services companies and representatives (e.g., agents, brokers, RIAs) working in the individual qualified plan market.
- PTE 2020-02, known as the “broad advice exemption”, covers financial services companies (namely, insurers) and their exclusive agents who offer a wide array of proprietary investment products and services to retirement investors.
- PTE 84-24 focuses on independent insurance agents, brokers, and pension consultants, and their business model in which they represent multiple insurers.
Adherence with PTEs requires strict requirements, including disclosure or conflicts of interest, and adherence to specific standards of conduct.
The Retirement Security Rule and amended PTEs are covered in more detail in WebCE’s upcoming course, DOL 2024 Retirement Security Rule.