On April 23, 2024, the Department of Labor (“DOL”) released its new fiduciary investment advice rule titled the “Retirement Security Rule” (the “Fiduciary Rule”). The Final Rule is scheduled to take effect September 22, 2024. The changes to exemptions PTE 2020-02 and PTE 84-24 will have an additional one-year transition period where exemptive relief will require a written acknowledgement of fiduciary status and compliance with impartial conduct standards. Given the history of the Fiduciary Rule, it is likely there will be litigation challenging the definition. We also expect the DOL will receive requests to delay the Fiduciary Rule’s implementation. 

The Fiduciary Rule is expected to have a significant impact on the retirement industry. Plan sponsors, such as yourself, should assess what changes are needed to comply with the new rule. 

Background on the Fiduciary Rule   

On October 31, 2023, the DOL released a proposed rule defining who is an investment advice fiduciary under the Employee Retirement Income Security Act (“ERISA”). The Fiduciary Rule also included proposed amendments to class prohibited transaction exemptions (“PTEs”) available to investment advice fiduciaries, including PTE 2020-02. On March 8, 2024, the DOL sent a final version of the Retirement Security Rule: Definition of Investment Advice Fiduciary  to the Office of Management and Budget (“OMB”) for review. 

The DOL has spent over a decade attempting to amend the previous, 1975 five-part test for fiduciary status. The Fiduciary Rule replaces the five-part test’s requirements that advice be provided on (1) a “regular basis” pursuant to (2) a “mutual agreement, arrangement or understanding” that (3) it would serve as “a primary basis for investment decisions” with a broader test that is based on the retirement investor’s reasonable expectations and context.  The Fiduciary Rule is broad and could cover certain marketing and other related activities considered common to the investment management industry. 

Under the five-part test, a person is providing investment advice only if the person: 

1. Renders advice to the ERISA plan or IRA as to the value of securities or other property, or makes recommendations as to investing in, purchasing, or selling securities or other property,  
2. On a regular basis, 
3. Pursuant to a mutual agreement, arrangement or understanding with the ERISA plan, the ERISA plan fiduciary, or the IRA owner that, 
4. The advice will serve as a primary basis for investment decisions with respect to the ERISA plan’s or IRA’s assets and 
5. The advice will be individualized based on the particular needs of the ERISA plan or IRA.  

A person who meets all five prongs of the test and receives direct or indirect compensation will be considered an “investment advice” fiduciary with respect to the applicable ERISA plan or IRA. 

Fiduciary Rule Overview 

Under the Fiduciary Rule, trusted advisers will have to: 

• Meet a professional standard of care when making recommendations (prudence standard); 
• Never put their financial interests ahead of the retirement investor’s when making recommendations (loyalty standard); 
• Avoid misleading statements about conflicts of interest, fees, and investments; 
• Charge no more than what is reasonable for their services; and 
• Give retirement investor basic information about the adviser’s conflicts of interest. 

The Fiduciary Rule provides that a financial service provider will be an investment advice fiduciary under federal pension law if: 

• The provider makes an investment recommendation to a retirement investor; 
• The recommendation is provided for a fee or other compensation, such as commissions; and 
• The financial services provider holds itself out as a trusted advisor 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 recommendation based on the investor’s best interest.  

The Fiduciary Rule seeks to eliminate the “loophole” for one-time advice. A financial services provider is deemed to be a fiduciary for a recommendation to roll over assets from a workplace retirement plan to an IRA if every element of the Fiduciary Rule definition is met. 

In addition to redefining the definition of a fiduciary, the Fiduciary Rule makes amendments to several PTEs: 

• PTE 2020-02 which provides relief for eligible investment advice fiduciaries; 
• PTE 84-24 which provides relief for the sale of insurance and annuity products to ERISA plans and IRAs; 
• PTEs 77-4, 75-1, 80-83, 83-1, and 86-128 that would eliminate the ability of investment advice fiduciaries to rely on exemptions and would make other changes to PTEs 75-1 and 86-128. 

Why should employers be aware of the Fiduciary Rule? 

Retirement savings is a bi-partisan public policy issue.  Americans spend their lifetimes contributing to their retirement savings so they can have those funds in retirement. Americans should be able to rely upon investment advice they receive.  If an investment advice provider is not held to a fiduciary standard, the provider is not required to put you and your plan participant’s interests first.  This gap can result in reduced returns or higher costs, eroding the retirement savings of Americans. The Fiduciary Rule provides you and your plan participants with protection by requiring investment advice providers to comply with high standards of care and loyalty when they make investment advice recommendations. 

How can BrownWinick assist you? 

If requested, BrownWinick can assist you in understanding the Fiduciary Rule’s impact to your plan and your plan participants. Contact Caleb Brus at 515-558-8867 or Cindy Lande at 515-242-2476. 

This is for general informative purposes only, is not a comprehensive overview of the Fiduciary Rule and should not be construed or relied upon as legal advice. BrownWinick will not be responsible for Fiduciary Rule legal advice for any entity unless an engagement is confirmed in writing by BrownWinick.