On October 31, 2023, the Department of Labor (“DOL”) issued its proposed Retirement Security Rule (“Fiduciary Rule”), which looks to change who may be considered to be an “investment advice fiduciary” under ERISA. The current definition of investment advice fiduciary was issued in 1975—a time when ERISA was just in its infancy and defined benefit plans dominated the industry. Over the past 50 years, we’ve seen defined contribution plans grow in popularity among plan sponsors while defined benefit plans fall out of favor.
Consistent with this trend, the DOL considers the 1975 regulation defining “investment advice fiduciary” out-of-date and not reflective of the average plan participant’s expectations when making decisions relating to their retirement investments. For example, under the 1975 rule, advice provided on a one-time basis, such as rollover recommendations, would generally not be considered as fiduciary advice. But in the eyes of the DOL, “one-time advice is often the most important advice retirement investor will ever receive.”
Under the DOL’s proposed Fiduciary Rule, a financial services provider would be an investment advice fiduciary if the following criteria exists:
the providers provides investment advice or makes an investments recommendation to a retirement investor,
the advice or recommendation is provided for a fee or other compensation, and
the financial services providers makes the recommendation in the context of a professional relationship in which an investor would reasonably expect to receive sound investment recommendations that are in their best interest:
the provider has discretion over investment decisions for the retirement investor;
the provider makes investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor's best interest; or
the provider states that they are acting as a fiduciary when making investment recommendations.
In mid-December, the DOL held a hearing regarding its proposed Fiduciary Rule. In addition, the DOL has received more than 20,000 public comments. Not surprisingly, the DOL’s proposed Fiduciary Rule received criticism from industry groups, which see the proposed Fiduciary Rule as over-reaching or unnecessary, compared with support from consumer advocates, which find that the investment advice fiduciary definition fails to reflect the current market and protect the average consumer. Another sign that the DOL’s proposed Fiduciary Rule remains controversial and contentious comes from the American Securities Association’s decision to request that Congress identify DOL staff members involved in the DOL’s proposed Fiduciary Rule and consider recusing those members from further involvement.
Now that the public comment period has ended, we’ll likely see a Final Rule issued by the DOL this year. We can further expect continued debates as to the merits of the rule as well as legal challenges to any final rule that is issued.