Insights on the Department of Labor's new fiduciary investment advice rule
A new rule by the U.S. Department of Labor (DOL) represents a shift in how retirement investment advice is regulated. Effective September 23, 2024, the fiduciary investment advice rule broadens the definition of a fiduciary under the Employee Retirement Income Security Act (ERISA) by aiming to ensure that financial service providers adhere to fiduciary standards and prioritize the best interests of retirement savers.1 Additionally, more specific requirements will go into effect in late 2025.2
This change is intended to protect investors from harmful conflicts of interest from financial professionals and to address gaps left by the previous 1975 rule.2 A lot has changed in the investment landscape since then, and the updates are welcome for some. However, there may also be unintended implications that have met with some concern.
Let’s take a look at the changes and how they came about.
Background of the legislation
The original 1975 rule required that for advice to be considered fiduciary, it had to be given on a regular basis and that the investor and financial professional had to mutually agree that it would serve as a basis for investment decisions. This framework, however, failed to protect against conflicts of interest in one-time or irregular advice scenarios.3
In 2016, the Department of Labor (DOL) issued a new fiduciary rule that broadened the definition of fiduciary investment advice to better protect retirement savers from conflicts of interest. However, this rule faced significant legal challenges for being too broad and it was determined by a circuit court of law that the DOL had overstepped its authority. In turn, the 1975 regulations were reinstated.3
Despite these setbacks, the DOL introduced a new fiduciary rule in 2023. It narrows the definition of a fiduciary further in an attempt to address any issues that might lead to a repeat of the legal challenges.3
The DOL definition of fiduciary responsibilities
With all the back and forth, it could leave some financial professionals scratching their heads. But the basic role of a fiduciary remains the same; fiduciary advice must be:
- Prudent — meets a professional standard of care
- Loyal — puts the investor’s interests first
- Honest — is free from misrepresentations
- Free from overcharges — doesn’t have unreasonable or excessive compensation2
The DOL updates, however, provide additional guidance on how to determine fiduciary responsibilities. If you are compensated for regularly providing professional recommendations to investors as part of your business — or acknowledge that you’re acting as a fiduciary — for any of the following, you have a fiduciary responsibility:
- Employee benefit plan, plan participant or beneficiary
- IRA, IRA owner or beneficiary
- Plan or IRA fiduciary with authority or control over the plan or IRA1
One issue this new rule helps to address is one-time advice to roll over a workplace retirement plan into a type of account that benefits the financial professional more than the client. Since workplace retirement accounts often represent significant assets, the rule may help protect investors from such a scenario.3
Updated amendments to the fiduciary rule
The 2016 rule applied to nearly all individuals who were compensated for providing recommendations to investors. The latest iteration of the fiduciary investment advice rule is more narrowly tailored and includes two key exemptions.3
The first exemption, PTE 2020-02, applies broadly to a wide range of investment advice for retirement investors. The second exemption, PTE 84-24, is tailored for independent insurance agents. Both exemptions require that investment advice adheres to Impartial Conduct Standards, helping to ensure that recommendations are made without conflicts of interest and that they prioritize the investor's best interests.3
The amendments also do not impose new contract or warranty requirements, helping to potentially reduce administrative burdens.3
Stakeholder perspectives
On the surface, it’s hard to argue that acting in the best interests of investors is a bad thing. But some legislators and financial professionals question whether the DOL is overreaching its bounds.
In particular, some suggest that the DOL wants to force more types of financial professionals to submit to its authority, pointing out that other regulatory bodies already exercise oversight over most retirement products and services. For example, the Securities and Exchange Commission's Regulation Best Interest already has rules in place for broker-dealers, and the National Association of Insurance Commissioners has its own best interest rules that apply to state-regulated annuity sales to help safeguard investors’ retirement savings.4
Another concern is among registered investment advisers, broker-dealers, and insurance companies that are small businesses. The costs to comply may be significant and it may be difficult to meet the rule's requirements.5
Will this latest version of fiduciary regulations face legal battles once again? Perhaps. Compliance challenges aside, as financial professionals shouldn’t our ultimate goal be to do all we can to position our clients for the best potential financial outcomes? Many of the outstanding individuals we work alongside every day are already acting as fiduciaries whether they claim to be one or not. Despite changes in regulations, their commitment to do the right thing remains the same, and we’re honored to work with them.
Need to connect on these or other issues? Reach out to our team.