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Retirement Security Rule; Definition of an Investment Advice Fiduciary rule (2023)

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The Retirement Security Rule: Definition of an Investment Advice Fiduciary rule is a proposed rule issued by the U.S. Department of Labor (DOL) on November 3, 2023, that proposed broadening the definition of a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA)—which primarily included pension plan managers and advisors—to govern financial professional interactions with individual investors in certain contexts.[1][2]

HIGHLIGHTS
  • Name: Retirement Security Rule: Definition of an Investment Advice Fiduciary
  • Agency: Employee Benefits Security Administration, Department of Labor
  • Action: Proposed rule
  • Type of significant rule: Other significant rule

    • Timeline

    The following timeline details key rulemaking activity:

    Background

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    Titles I and II of the Employee Retirement Income Security Act of 1974 (ERISA) govern private-sector employee benefit plans and establish standards for fiduciary responsibilities.[1]

    Under ERISA, fiduciaries are legally responsible for certain duties, including:[3]

    • The duty of loyalty, which refers to the responsibility of fiduciaries to act in the best interests of beneficiaries at all times and recuse themselves from decision-making if they have any conflicting interests.
    • The duty of prudence, which refers to the responsibility of fiduciaries to make decisions with the skill, risk awareness, and consideration expected of a prudent person.

    1975 fiduciary definition

    The department issued a rule in 1975 establishing a fiduciary definition that primarily applied to employer-funded pension plan managers and plan advisors. The definition did not include many professionals like insurance agents, stock brokers, or investment advisers who would typically offer advice to an individual investor (such as one managing 401k or IRA accounts). The 1975 definition also only typically applied if advice was given regularly and if there was an explicit "'mutual agreement, arrangement, or understanding' that the advice will serve as 'a primary basis for investment decisions,'" according to the U.S. Department of Labor (DOL).[2]

    2016 fiduciary definition

    The DOL published an updated rule in 2016 that broadened the fiduciary definition under the ERISA to govern almost any investment advisor who received payment for recommendations to individual investors. The rule also required fiduciary advisors to enter into contracts with investors and provide warranties for their products or advice.[2]

    2018 court reversal

    A federal court in 2018 struck down the 2016 rule, arguing that the regulation was too broad and exceeded "the Department's authority by requiring advice providers to execute enforceable contracts and make specified warranties to investors," according to the Department of Labor. With the striking of the 2016 rule, the 1975 rule became effective again.[2]

    2023 proposed rule

    The 2023 proposed rule would expand fiduciary definitions from the 1975 rule but the department says the proposed definitions and requirements are narrower than those in the 2016 rule. The 2023 proposal would only apply the fiduciary standard definition to financial professionals in certain contexts where, in the view of the DOL, an individual investor might "reasonably place trust and confidence in the financial services provider."[2]

    The proposal also does not include additional contract or warranty requirements.[2]

    Summary of the rule

    The following is a summary of the rule from the rule's entry in the Federal Register:

    “ This document contains a proposed amendment to the regulation defining when a person renders “investment advice for a fee or other compensation, direct or indirect” with respect to any moneys or other property of an employee benefit plan, for purposes of the definition of a “fiduciary” in the Employee Retirement Income Security Act of 1974 (Title I of ERISA or the Act). The proposal also would amend the parallel regulation defining for purposes of Title II of ERISA, a “fiduciary” of a plan defined in Internal Revenue Code (Code) section 4975, including an individual retirement account. The Department also is publishing elsewhere in today's Federal Register proposed amendments to Prohibited Transaction Exemption 2020–02 (Improving Investment Advice for Workers & Retirees) and to several other existing administrative exemptions from the prohibited transaction rules applicable to fiduciaries under Title I and Title II of ERISA.[1][4] ”

    Summary of provisions

    The following is a summary of the provisions from the final rule's entry in the Federal Register:[1]

    “

    The Department of Labor is proposing a new regulatory definition of an investment advice fiduciary for purposes of Title 1 and Title II of the Employee Retirement Income Security Act (ERISA). As compared to the existing regulatory definition, which dates to 1975, the proposal better reflects the text and the purposes of the statute and better protects the interests of retirement investors, consistent with the mission of the Department's Employee Benefits Security Administration to ensure the security of the retirement, health, and other workplace-related benefits of America's workers and their families.

    The Department proposes that a person would be an investment advice fiduciary under Title I and Title II of ERISA if they provide investment advice or make an investment recommendation to a retirement investor (i.e., a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary); the advice or recommendation is provided “for a fee or other compensation, direct or indirect,” as defined in the proposed rule; and the person makes the recommendation in one of the following contexts:

    • The person either directly or indirectly (e.g., through or together with any affiliate) has discretionary authority or control, whether or not pursuant to an agreement, arrangement, or understanding, with respect to purchasing or selling securities or other investment property for the retirement investor;
    • The person either directly or indirectly (e.g., through or together with any affiliate) 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 person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.[4]
    		 ”

    Significant impact

    See also: Significant regulatory action

    Executive Order 12866, issued by President Bill Clinton (D) in 1993, directed the Office of Management and Budget (OMB) to determine which agency rules qualify as significant rules and thus are subject to OMB review.

    Significant rules have had or might have a large impact on the economy, environment, public health, or state or local governments. These actions may also conflict with other rules or presidential priorities. Executive Order 12866 further defined an economically significant rule as a significant rule with an associated economic impact of $100 million or more. Executive Order 14094, issued by President Joe Biden (D) on April 6, 2023, made changes to Executive Order 12866, including referring to economically significant rules as section 3(f)(1) significant rules and raising the monetary threshold for economic significance to $200 million or more.[1]


    The text of the rule states that OMB deemed this rule significant but not economically significant:

    “ It has been determined that this proposal is significant within the meaning of section 3(f)(1) of the Executive Order. Therefore, the Department has provided an assessment of the proposal's potential costs, benefits, and transfers, and OMB has reviewed the proposal.[4] ”

    Text of the rule

    The full text of the rule is available below:[1]

    Responses

    The following sections provide a selection of responses to the proposed rule issued by the DOL:

    Support for the rule

    A White House statement argued that the proposed rule would protect individual investors from bad advice and what the Biden administration called junk fees:[5]

    “ Today’s proposed Retirement Security rule by the Biden Administration expands protections for retirement savers, ensures sounder financial advice, lowers investment junk fees, and gives every American saving for retirement greater peace of mind about their portfolios.[4] ”


    National Economic Council Director Lael Brainard argued that the proposed rule would protect investors from conflicts of interest and reduce incentives for advisers to recommend certain products based on their expected commissions:[6]

    “ [R]etirement advisers shouldn't be paid more for recommending one investment product over another, if it isn't in the client's best interest. ... Advisers may earn as much as a 6.5% commission to recommend one retirement product over another. Over a lifetime, those conflicts of interest can really add up and cost retirement savers up to 20% of their entitlement savings — that's tens or even hundreds of thousands of dollars per middle-class saver.[4] ”

    Opposition to the rule

    Chris Iacovella, the president and CEO of the American Securities Association, argued the rule is too broad and that the Biden administration's arguments promoting the rule are misleading:[7]

    “ [The Biden administration's] attempt to justify new rules for financial advisors as stopping ‘junk fees’ is purposefully designed to mislead to the American people. ... Similar to the Obama administration’s DOL fiduciary rule, the Biden administration’s fiduciary rule lacks any empirical and legal basis to be adopted as a final rule[4] ”


    Wayne Chopus, president and CEO of the Insured Retirement Institute in Washington, compared the 2023 proposed rule to the rule adopted in 2016 and argued it would overregulate the financial advisory industry and prevent lower and middle income investors from accessing good advice:[7]

    “ Despite labeling the proposal as ‘retirement security’ … the rule will only increase retirement insecurity and result in millions of lower- and middle-income workers and retirement savers losing access to needed financial advice. ... [The Insured Retirement Institute] will fight this proposal just as we did with DOL’s 2016 poorly concocted fiduciary rule that also masqueraded as consumer protection but instead caused extensive harm.[4] ”


    See also

    External links

    Footnotes

    1. ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Federal Register, "Retirement Security Rule: Definition of an Investment Advice Fiduciary," November 3, 2023
    2. ↑ 2.0 2.1 2.2 2.3 2.4 2.5 U.S. Department of Labor, "Fact Sheet: Retirement Security Proposed Rule and Proposed Amendments to Class Prohibited Transaction Exemptions for Investment Advice Fiduciaries," accessed November 27, 2023
    3. ↑ U.S. Department of Labor, "Fiduciary Responsibilities," accessed November 27, 2023
    4. ↑ 4.0 4.1 4.2 4.3 4.4 4.5 4.6 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
    5. ↑ The White House, "The Retirement Security Rule – Strengthening Protections for Americans Saving for Retirement," October 31, 2023
    6. ↑ Washington Examiner, "Biden proposes rule to cut junk fees for retirement savers," October 31, 2023
    7. ↑ 7.0 7.1 Think Advisor, "Critics Take Aim at New DOL Fiduciary Rule," accessed November 27, 2023
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