DOL Finalizes Fiduciary Investment Advice Regulation | Practical Law

The Department of Labor (DOL) has finalized a regulation on the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA). The DOL also finalized changes to multiple prohibited transaction exemptions (PTEs) relating to investment advice.

DOL Finalizes Fiduciary Investment Advice Regulation

Practical Law Legal Update w-043-0543 (Approx. 7 pages)

DOL Finalizes Fiduciary Investment Advice Regulation

by Practical Law Employee Benefits & Executive Compensation

Background

Enacted in 1974, ERISA's statutory definition of "fiduciary" provides that a person is a fiduciary with respect to a plan to the extent the person:

Exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of the plan's assets.
Renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so.
Has any discretionary authority or discretionary responsibility in the administration of such plan.

(ERISA § 3(21)(A) ( 29 U.S.C. § 1002(21)(A) ).)

Five-Part Test (1975)

In 1975, the DOL issued a regulation creating a five-part test that defined when an individual provides "investment advice" under ERISA § 3(21)(A)(ii). An individual provides investment advice if they render advice:

As to the value of securities or other property, or make recommendations about investing in, purchasing, or selling securities or other property.
On a regular basis.
Pursuant to a mutual agreement, arrangement or understanding:
- that the advice will be the primary basis for investment decisions regarding plan assets; and
- that the advice will be individualized to the particular needs of the plan.

( 29 C.F.R. § 2510.3-21(c) .)

For more information, see Practice Note, ERISA Fiduciary Duties: Overview: Determining Fiduciary Status .

Path to 2024 Final Regulation

The 2024 regulation comes six years after the DOL's prior rulemaking on the fiduciary rule was vacated in court.

The DOL originally proposed changes to the fiduciary rule in 2010. That rule was withdrawn in 2011, re-proposed in 2015, and finalized in April 2016. In 2018, the US Court of Appeals for the Fifth Circuit vacated the 2016 fiduciary rule in Chamber of Commerce of the United States of America v. United States Dep't of Labor ( 885 F.3d 360 (5th Cir. 2018) ). As a result of the decision, the pre-amendment version of the rule (the 1975 five-part test) was reinstated (see Article, Expert Q&A on the Demise of the DOL's Fiduciary Rule ).

Following the vacatur, the DOL finalized PTE 2020-02, a class exemption on fiduciary investment advice to retirement investors, including in the context of rollovers (see Legal Update, DOL Finalizes Fiduciary Investment Advice PTE 2020-02 ). In February 2023, the US District Court for the Middle District of Florida issued an opinion vacating an element of the DOL's rollover policy (see Legal Update, District Court Vacates DOL Guidance on Fiduciary Investment Advice Involving Rollovers ).

2023 Proposal

On October 31, 2023, the DOL released a proposed regulation on the definition of an investment advice fiduciary ( 88 Fed. Reg. 75890 (Nov. 3, 2023) ; see Legal Update, DOL Releases Fiduciary Investment Advice Proposals ).

The DOL held public hearings on the proposal in December 2023. The DOL sent the final fiduciary rule to OMB on March 8, 2024, and OMB completed its review on April 10, 2024.

2024 Final Regulation

The DOL cites as reasons for changing the five-part test:

The current regulatory landscape, including:
- the SEC's adoption of Regulation Best Interest in 2019; and
- state-based legislative developments on fiduciary conduct standards.
The growth of participant -directed investment arrangements and IRAs, compared to the prevalence of defined benefit plans when the 1975 regulation was issued.
Increased variety and complexity of financial products and services.

Final Definition

The final fiduciary regulation states that a person is an investment advice fiduciary if they make a recommendation to a retirement investor for a fee or other compensation, in one of the following contexts:

The person either directly or indirectly (through or together with any affiliate) makes professional 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 retirement investor's particular needs or individual circumstances;
- reflects the application of professional or expert judgment to the retirement investor's particular needs or individual circumstances; and
- may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor's best interest.
The person represents or acknowledges that they are acting as an ERISA fiduciary when making the recommendation.

Recommendations are defined to include:

The advisability of acquiring, holding, disposing of, or exchanging securities or other investment property, investment strategy, or how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA.
The management of securities or other investment property, including:
- recommendations on investment policies or strategies;
- portfolio composition;
- selection of other persons to provide investment advice or investment management services;
- selection of investment account arrangements; and
- voting of proxies.
Rolling over, transferring, or distributing assets from a plan or IRA, including recommendations as to whether to engage in the transaction, the amount, the form, and the destination of such a rollover, transfer, or distribution.

Retirement investors are defined to include a plan, plan participant or beneficiary, plan fiduciary, IRA, IRA owner or beneficiary, or IRA fiduciary.

The final regulation also clarifies that:

Sales recommendations that do not satisfy an objective test are not fiduciary advice.
Providing investment education or information is not advice absent a recommendation.

Disclaimers

Typically, investment advice providers include boilerplate disclaimers that may conflict with other communications and interactions between the providers and the investor. Consistent with the proposal, written statements disclaiming fiduciary status do not control to the extent that they are inconsistent with:

Oral communications.
Marketing materials.
State or federal law.
Other interactions with the retirement investor.

Rollovers

Under the 1975 fiduciary rule, advice provided on a one-time basis (such as rollover advice) is typically not required to be in the saver's best interest.

Under the final regulation, one-time advice is not excluded from treatment as fiduciary investment advice. The DOL's position is that advice in connection with a rollover decision, even if not accompanied by a specific recommendation on how to invest assets, should be treated as fiduciary investment advice.

Education

An ongoing question for plan sponsors has been to what extent the fiduciary rule will affect educational materials for participants, particularly those around plan distribution and rollover options. The final regulations include a statement that merely providing investment information or education is not fiduciary advice. The preamble also gives examples of categories of information that would not be considered fiduciary advice, such as general methods and strategies for managing assets or the information contained in the Code Section 402(f) notice. For more information, see Practice Note, Participant Investment Education and Investment Advice .

Health Plan Arrangements

Consistent with the proposal, the term "IRA" includes health savings accounts (HSA) and certain other tax-advantaged trusts and plans. The final regulation includes owners of HSAs in the definition of " retirement investor." However, the term "investment property" does not include health insurance policies, disability insurance policies, term life insurance policies, or other property to the extent the policies or property do not contain an investment component. For more information, see Practice Note, Defined Contribution Health Plans: Overview .

PTE Changes

Multiple PTEs were amended under the proposal. Currently, PTEs 75-1, 77-4, 80-83, 83-1, and 86-128 allow investment advice fiduciaries to receive compensation for certain transactions. The final amendments will remove fiduciary investment advice from the covered transactions and make other administrative changes.

After the final amendments, PTE 84-24 will provide exemptive relief for independentproducers that provide investment advice. In other situations, PTE 2020-02 will be the source of exemptive relief for investment advice, including insurance product recommendations.

Consistent with the proposal, the DOL amended the most recent of the exemptions, PTE 2020-02, to:

Expand coverage to include investment advice by a Pooled Plan Provider (see Practice Note, Multiple Employer Retirement Plans (MEPs): Pooled Plan Providers ).
Clarify the fiduciary acknowledgment requirement.
Add disclosures around an investor's right to obtain information and revise the rollover disclosure.
Allow financial institutions providing investment advice through computer models (robo-advice) to rely on the exemption.

For more information on PTE 2020-02, see Compliance with Prohibited Transaction Exemption 2020-02 Checklist . For details on other PTEs, see Practice Note, Prohibited Transactions and Exemptions Under ERISA and the Code .

Practical Implications

The final regulation and amended PTEs become effective on September 23, 2024. In addition, there will be a one-year transition period for PTEs 84-24 and 2020-02 to give parties time to comply.

Virtually all brokers, financial and investment advisors, and insurance agents are affected by the final fiduciary rule and amended PTEs. Retirement plan sponsors, administrators, and service providers need to familiarize themselves with the contents of the release and monitor any further guidance from the DOL.

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