One week after the release of the final retirement security rule, senior officials with the Department of Labor’s Employee Benefits Security Administration (EBSA) defended the rollout of the fiduciary rule while taking a deeper dive to explain some of the key changes. 
The DOL on April 23 released the final rule, which updates the DOL's interpretation of fiduciary standards under ERISA, contending that the 1975 version of the rule was outdated and did not adequately protect retirement investors in today's workplace.
“This rule updates a 1975 rule that was well past due for a change almost 50 years ago. When the department first issued the rule, 401(k) plans did not exist and there were very few IRAs,” explained Lisa Gomez, Assistant Secretary for Employee Benefits Security, who was joined by Principal Deputy Assistant Secretary Ali Khawar, and EBSA Deputy Assistant Secretary for Program Operations Tim Hauser in an April 29th webinar hosted by the DOL.
“If you are an investment professional holding yourself out as giving individualized advice that the investor can rely upon to advance their best interests, then that's what you must do,” the Assistant Secretary further noted. “Put simply, this means that advice must be prudent, loyal, and free from misrepresentations and excessive compensation. We don't think that this is too much to ask, it's just honoring retirement investors' legitimate expectations.”
Accordingly, the final rule seeks to level the playing field by requiring all advisors to adhere to the same standards, regardless of the type of investment or the type of investor, the officials explained. Gomez noted,
“It shouldn't matter whether the advisor recommends securities, commodities, insurance products, real estate or something else. And it shouldn't matter if the recommendation is to an individual plan participant or to a small business owner looking for advice on what to include in a 401(k)-plan menu.”
While the rule becomes effective on Sept. 23, 2024, the DOL expects affected firms to have policies and procedures in place to comply with the rule by Sept. 23, 2025. The obligations during the interim period are to abide by the impartial conduct standards, the officials noted, familiar standards under DOL's ERISA guidance.
Changes From the Proposed Rule
Diving into the meat of the discussion, Khawar and Hauser outlined how the final rule includes changes from the proposed rule based on feedback and comments received during the comment period. The Principal Deputy Assistant Secretary emphasized,
“We thought hard about some of the things that people were raising but also did so while retaining that core principle that we had. And that has been a hallmark of this project, of ensuring that when people are in a situation where they really do deserve and expect to have best interest advice, that that is going to be the case and at least in this iteration, ensuring that level playing field.”
Some of the changes include eliminating the automatic fiduciary status prong based on having discretionary authority over any part of a retirement investor's assets; modifying the definition of retirement investor so that it generally does not cover wholesalers and other intermediaries; and providing additional time for compliance with the rule from 60 days to 150, Khawar noted.
Under the proposed rule, fiduciary status could result in assorted ways: through a context-specific test based on the kind of circumstances surrounding the interactions; through a written statement or oral statement that the person is acting as a fiduciary; and by discretionary management of assets.
Khawar remarked that the DOL, in the final rule, eliminated the bright-line discretionary prong in favor of a facts-and-circumstances analysis in response to various comments received about how that would work and how it interplayed with other provisions of ERISA. “So the test and the final rule is primarily focused on the context, but it, of course, points out that in a situation where you have explicitly acknowledged your fiduciary status, whether you've done that orally or in writing, that context is essentially always met,” he noted.
The Principal Deputy Assistant Secretary also explained how the final rule includes information and education as distinct from advice. It also specifically distinguishes a recommendation in the context of a sales pitch and the provision of best interest advice. The final rule also reformulates the facts and circumstances test to focus on the specific relationships the rule aims to target. Hauser observed,
“We thought that commenters had the better of us on some of their comments … and when we saw that, we made those changes, including eliminating the automatic fiduciary status based on having discretionary authority over any part of somebody's assets, and the inclusion of information and education as something distinct from advice in the text of the rule.”
The rule also includes updates to Prohibited Transactions Exemption 2020-02 (PTE 2020-02), PTE 84-24 and others. These exemptions, the officials noted, provide relief for certain transactions and compensation arrangements, but also require adherence to the best interest standard. The disqualification provisions in PTE 84-24 and PTE 2020-02 have also been changed under the final rule, such that, based on certain conduct and actions, the ability to rely on the exemptions may be lost.
The DOL also clarified that independent insurance agents can rely on the rule and that broker-dealers can rely on the Securities and Exchange Commission’s Regulation Best Interest as a basis for determining what constitutes investment advice under the rule.
As to the final rule and changes under PTE 2020-02, Khawar explained that the changes include coverage for robo-advisors that could not otherwise get relief. Said Khawar,
“They are now covered in the final rule, but also there are certain kinds of transactions that you couldn't receive compensation for relying on 2020-02, and in particular, I would highlight principal transactions as an area where there's more relief in the final version of 2020-02 than people could rely on ahead of time.”
Finally, the final rule did not finalize many of the proposed disclosures that were part of the modifications to PTE 2020-02. Instead, there is a requirement for a fiduciary acknowledgement disclosure, the DOL officials emphasized.
“The other thing that I would flag is, of course, advice to plans is not covered by Reg BI. And so that is an area where I think thinking about your policies and procedures more broadly, because there are going to be other circumstances where those same policies and procedures may need to apply, particularly in the context of advice to plans,” Khawar further remarked.
- Log in to post comments