The Department of Labor (DOL) has spent 14 years trying to update the definition of an investment advice fiduciary, and there is no doubt that regulators are determined that this newest effort will land. Under the 2024 Final Retirement Security Rule update, a professional in the business of regularly providing investment advice is considered a fiduciary when providing advice (in exchange for compensation) that appears to be targeted toward aiding a particular investor’s best interest. Working hand-in-hand with amendments to exemptions from the prohibited transaction rules, this broad definition (29 C.F.R. §2510.3-21) combined with a “reasonable investor” standard is designed to protect investors and better address the purpose of the Employee Retirement Income Security Act (ERISA) than the previous definition.
The Initial Application
A fiduciary involved in employee benefit plans is charged with acting in the interest of plan participants and beneficiaries. Although the language in Titles I and II of ERISA is not identical, fiduciaries are barred from participating in transactions that result in a conflict of interest unless they can apply a prohibited transaction exemption (PTE).
ERISA’s statutory definition of a fiduciary is broad, and includes anyone with authority over the plan or who provides investment advice for compensation, whether direct or indirect. In 1975, the DOL created a five-part test to determine exactly how investment advice must be given to create a fiduciary responsibility. This five-part test considerably narrowed the definition of a fiduciary, resulting in the rules only applying if an advisor (1) provided advice about the value of securities or investment strategies (2) on a regular basis (3) under an arrangement with the plan that (4) such advice would serve as a basis for investment decisions and (5) was individualized based on plan needs.
Unrecognizable Terrain
The DOL’s narrowing of the fiduciary role did not foresee that managed pension plans would give way to IRAs and 401ks, resulting in many employees managing their own investments rather than ceding control to professionals. The rapid changes in investment vehicles and the amount of available information on the topic have made investors vulnerable to advice that is not in their best interest. Expansion of the definition of a fiduciary was a necessary step for investor protection, which the DOL began in 2010 through proposed rules, hearings, and years of discussion. In 2016, the DOL issued a Final rule that generally identified fiduciary status for advice from self-identified fiduciaries, advice delivered under arrangement for particular investors tailored to their needs, or recommendations made to specific investors regarding employee benefit plan investments or management decisions.
The 2016 Final rule was ultimately struck down by the U.S. Court of Appeals for the Fifth Circuit, which held that the rule conflicted with ERISA by extending fiduciary status to relationships that were not marked by “trust and confidence.” The Court pointed to Congress’s motivation in enacting ERISA, which was to codify common-law fiduciary status applied to relationships with this “touchstone” of trust and confidence. Following this decision, the DOL reinstated the 1975 five-part rule. Since then, the Securities and Exchange Commission (SEC), state regulators, and industry groups have focused on applying fiduciary status to advisors and ensuring investor protection while the DOL planned its next approach.
Keep Status in Mind When Giving Advice
An advisor can self-identify as a fiduciary, but simply disclaiming fiduciary status is not enough to escape the responsibilities if this disclaimer is inconsistent with interactions with the investor, marketing materials, or applicable law. However, not everyone who provides a recommendation fits the parameters of a fiduciary under the regulation. As the rule points out, a salesperson making a general recommendation that is not the result of applying professional judgment to furthering an investor’s best interest based on an analysis of their unique circumstances would not be considered a fiduciary.
Legal teams and trusted advisers across the country are taking proactive steps to ensure compliance with the updated rule. These steps may include revising internal policies, enhancing client communication protocols, and ensuring ongoing education and training for all advisors. Increased scrutiny from regulators is expected, and companies are preparing for this attention by maintaining comprehensive documentation of compliance efforts and advisor-client interactions.
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