Department of Labor Finalizes Retirement Security Rule, Updating Fiduciary Standards

The U.S. Department of Labor finalized its Retirement Security Rule on April 23, 2024, updating the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. The rule aims to protect retirement savers by requiring investment advice providers to adhere to high standards of care and loyalty when recommending investments.

Under the new rule, a person is considered a fiduciary if they provide investment advice or recommendations for a fee and in certain contexts, such as making regular individualized recommendations that investors rely on. The rule removes three prongs from the previous five-part test for determining fiduciary status and applies a best interest standard to advice that plan sponsors receive about 401(k) investments.

The updated definition will take effect on September 23, 2024, and applies when financial services providers give compensated investment advice to retirement plan participants, individual retirement account owners, and plan officials. The Department of Labor also amended related existing administrative prohibited transaction exemptions to make the conditions more uniform and protective.

Why this matters: The Council of Economic Advisers estimates that conflicted advice costs individuals up to $5 billion per year on fixed index annuities alone. The new rule aims to ensure that retirement investors receive advice that adheres to a professional standard of care and is free from misstatements and overcharges.

While the Department of Labor says the rule is a necessary update to modernize protections for retirement savers, some industry groups have raised concerns. The Insured Retirement Institute argues that the rule will harm consumers by limiting their access to financial guidance and products. However, proponents like the American Retirement Association believe it is a necessary update to ensure that investment advice given to plan sponsors complies with ERISA's fiduciary standards.

Lisa Gomez, the head of the DOL's Employee Benefits Security Administration, stated that the new rule "fixes the 1975 rule's shortcomings" and is "a major step forward" in ensuring retirement investors receive advice that adheres to a professional standard of care. The final rule narrows the contexts in which a covered recommendation will constitute ERISA fiduciary investment advice and clarifies that sales recommendations that do not satisfy the objective test will not be treated as fiduciary advice.

Key Takeaways

• DOL finalized Retirement Security Rule updating ERISA fiduciary definition
• Rule requires investment advice providers to adhere to high standards
• Removes 3 prongs from previous 5-part test for fiduciary status
• Estimates $5B/year savings from eliminating conflicted advice on annuities
• Some industry groups raise concerns about limiting consumer access