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New Department of Labor Fiduciary Rule: Protecting Retirement Security

“Requiring advisers to make recommendations in the savers’ best interest can increase retirement savers’ returns by between 0.2% and 1.20% per year. Over a lifetime, that can add up to 20% more retirement savings.”[1] – The White House

New Definition of An Investment Advice Fiduciary

This proposed rule is the DOL’s third attempt since 2010 to amend the five-part test (originally issued in 1975) for determining whether a person is a “fiduciary” by reason of providing “investment advice” for a fee. The DOL states that “individual investors have far greater responsibility for decisions about their retirement savings than was true in 1975, when investment professionals directly managed plan investments.” The retirement landscape has drastically changed over the years shifting away from defined benefit pension plans to defined contribution plans and Individual Retirement Accounts (IRAs) where employees are now responsible for their retirement savings.

The chart below compares the current 5-part investment advice test to the proposed modernized approach.

Under the nearly 50-year-old rule, a financial services provider is an investment advice fiduciary only if, among other things, the advice is provided on a "regular basis" and there is a "mutual agreement, arrangement, or understanding" that the advice will serve as "a primary basis for investment decisions."[2] The modernized version offers greater protection for retirement savers who rely on the advice they receive by a financial services provider. Under the proposed rule fiduciary status would apply to a person who makes investment recommendations to investors on a regular basis as part of their business and the recommendation is based on the particular needs or individual circumstances of the retirement investor.

The DOL is also proposing three sets of amendments to prohibited transaction exemptions available to investment advice fiduciaries so that fiduciaries who use them must follow consistent and protective compliance requirements, including an obligation to act in retirement investors' best interest.[3] The overall goal of the proposed amendments is to make the exemption conditions more “uniform and protective.” 

The proposed rule offers retirement savers protection and fixes industry “loopholes” in the following three ways:

1. Inclusion of commodities and insurance products. When making a recommendation to a client, securities such as mutual funds must be in the best interest of the client. The Security and Exchange Commission’s (SEC) Regulation Best Interest currently does not cover commodities and insurance products. The proposed rule would require an advisor to provide advice that is in the best interest of the client concerning any security and insurance product.
    
2. Rolling assets out of an employer-sponsored plan. Under ERISA, advice that is provided on a one-time basis, such as a rollover from a 401(k) plan to an Individual Retirement Account (IRA) is not currently required to be in the investor’s best interest. The proposed rule would ensure this advice is in the investor’s best interest.
    
3. Available investments in an employer-sponsored plan. The proposed rule will require investment advisors to select investments that are in the best interest of the plan participants. The White House feels that “since most Americans primarily save for retirement through their employers, making sure the investments available to them are in their best interest is critically important.”

Next Steps

The proposed rule includes a 60-day comment period ending on January 2, 2024. After the 60-day period, the DOL will review the comments and draft the final rules.

The new rule’s intent is to provide clarity to retirement savers on what they can expect from their financial advisors when servicing their accounts. Please contact your local Spectrum representative with any questions regarding this proposed rule and how it may impact your plan.