On October 31, 2023, the Department of Labor ("DOL") issued its latest attempt at revising the rules regarding when investment professionals who provide "investment advice" to employee benefit plans or plan participants are a fiduciary under the Employee Retirement Income Security Act of 1974 ("ERISA"). This proposed rule represents the most recent bid by the DOL to expand on the fiduciary rule first established in 1975 to make more investment advisors ERISA fiduciaries, and as a result, subject to the high fiduciary standards imposed by ERISA. This time, however, the DOL has labeled its new rule as the "Retirement Security Rule", rather than the more traditional "fiduciary" rule.
With this proposed rule, the DOL is attempting to replace the 1975 five-part test for whether a person is an ERISA fiduciary because they are providing investment advice with a three-part test designed to expand who is an ERISA fiduciary. An earlier DOL attempt under the Obama Administration to change the definition of who is a fiduciary was struck down by the Fifth Circuit Court of Appeals as over-reaching the DOL's authority. Drafted to avoid this problem, the new proposed rule emphasizes relationships of trust and confidence. From the preamble to the proposed rule, it is clear that the DOL is concerned about investment professionals who work with plan participants who are deciding whether to rollover their ERISA plan account. The decision to execute a rollover of retirement plan benefits is generally a one-time decision that the DOL explains can have a significant impact on an individual's retirement savings. Yet, under the 1975 rule, many advisors who assist participants with this decision are not ERISA fiduciaries when providing rollover advise on a one-time basis.
In order to avoid this result, the DOL proposes to re-write current rule that generally requires that the investment advice be provided on a "regular basis". Under the proposed rule, the new requirement would be that the advice be provided on a regular basis as part of the advisor's regular business, and the recommendation is made under circumstances indicating that the recommendation is based on particular needs or individual circumstance. In this way, providing rollover advice to a retirement investor on a one-time basis could fall within the definition of an ERISA fiduciary.
The DOL's new release also proposes to update some existing prohibited transaction exemptions ("PTEs") so that all the different investment professionals who would be ERISA fiduciaries under the revised rule would be subject to the same standards of conduct to qualify for a prohibited transaction exemption – i.e., that they must act in the "best interest" of the retirement investor when making a recommendation and take action to mitigate the investment advisor's conflicts of interest.
Although the DOL's proposal addresses the concern expressed by the Fifth Circuit Court of Appeals, it will no doubt be subject to challenge in the courts. We are already seeing requests from those in the investment industries for the DOL to extend the period for comments on the proposed rule (from 60 days to 120 days).
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