January 22nd, 2024 | Robert Batt, Client Success Manager, CapitalROCK
The most recent proposal from the U.S. Department of Labor (DOL) issued on October 31, 2023, is another step to define and refine the concept of “who is an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA)” (1). The DOL’s stated purpose (according to their bulletin published the same day) of this is designed to “protect retirement investors by requiring trusted advice providers to adhere to high standards of care and loyalty when they make investment recommendations, and to avoid recommendations that favor their own financial interests at the expense of retirement savers.” (1)
From an industry point of view, this will expand the scope of who is considered fiduciaries. Additionally, the DOL also indicated their desire to streamline how to manage conflicts of interest through amendments provided to the class prohibited transaction exemptions (PTEs).
This article will touch on the history, proposed changes, and potential impacts of this new regulation, should it move forward.
For nearly fifty years, there have been regulations attempting to address this very question of who a fiduciary is. Beginning in 1975 with the enactment of the Employee Retirement Income Security Act (ERISA). During this time, the common type of plan was defined benefit plans, i.e., pensions.
As many of you know, this journey takes us back to the application of the Employee Retirement Income Security Act of 1974 or ERISA and the DOL’s adaptation of the Five-Part Test.
To be considered a fiduciary for giving investment advice under the existing guidelines, the DOL and Internal Revenue System (IRS), an advisor must answer “yes” to all the following:
1. Will the advisor render advice to the plan, plan fiduciary, or IRA owner as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property?
2. Will the advice be given on a regular basis?
3. Is the advice given pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or client?
4. Will the advice serve as a primary basis for investment decisions with respect to plan?
5. Is the advice individualized based on the particular needs of the plan or IRA?
The investment advice and retirement plan landscape has changed significantly over the last fifty years. With a shift from defined benefit plans to defined contribution plans and an increase in the various businesses/individuals providing services to clients, the DOL appears to feel that it is time to revisit the guidelines and scope of the definitions and accompanying rules.
The DOL’s continuous attempt for the industry to act in the client’s best interest, and from an industry perspective to allow firms to compete on a level the playing field, the new rule will replace the Five-Part Test with the following guidelines (1):
Well, first, this is still just a proposal, nothing is written in stone (yet), but still bears weight as it highlights areas that the DOL and other regulators have tried to focus on at various times in the past. As the scope and landscape of financial services change, the DOL and other regulators are likely to follow up with new guidelines and rules.
As stated earlier, “leveling the playing field” through redefining who is a fiduciary, seems to be a focal point and there is a lot of discussion as to the best way to do it. If the past is any indication, the conversation may not be over as there has been an exceedingly high response and dialogue to the timing and content of the proposal by various industry players.
Time will tell as to what ends up being included in the new “rule,” but now we wait.
Resources:
https://www.govinfo.gov/content/pkg/FR-2023-11-03/pdf/2023-23781.pdf
https://www.proskauer.com/blog/game-of-tomes-a-guide-to-the-dols-retirement-security-rule-proposal
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