This broadened definition aims to enhance protections for individuals saving for retirement through ERISA-covered plans and to ensure that financial advisors adhere to the highest standards of ethical conduct. A link to the Final Rule is here. 

Background

Title I of ERISA sets forth strict duties of prudence and loyalty for fiduciaries managing employee benefit plans, requiring them to act solely in the interest of participants and beneficiaries and avoid conflicts of interest. Starting in 2010, the DOL initiated a reevaluation of the definition of an investment advice fiduciary definition under ERISA. This led to a 2016 Final Rule that expanded the fiduciary definition to include a broader range of investment advice activities, aiming to align with the evolving financial landscape and modern expectations of individuals saving for retirement. However, the 2016 Rule was vacated by the US Court of Appeals for the Fifth Circuit in 2018 due to concerns it extended fiduciary status too broadly. In response, the DOL reinstated an original 1975 regulation and introduced new exemptions.

Against this backdrop, the DOL first proposed the Retirement Security Rule in 2023. The now-finalized version of this rule seeks to modernize ERISA's fiduciary definitions and close gaps left by the 1975 regulation, in an effort to ensure that the Final Rule meets the current and reasonable expectations of retirement savers. 

Key Provisions of the Final Rule

Following a public comment period and hearings in late 2023, the DOL made several adjustments in the Final Rule, which include:

• Expanded Definition of Investment Advice Fiduciary: The Final Rule broadens the definition of a fiduciary under ERISA to include those who regularly provide tailored investment advice, acknowledge fiduciary status, and expect compensation, directly or indirectly. Specifically, the expanded scope covers the provision of advice in various contexts such as rollover transactions, non-securities product recommendations, and advice to plan fiduciaries. The rule also adopts stringent fiduciary conduct and conflict of interest standards aligned with the SEC’s “Regulation Best Interest,” impacting management decisions from selecting advisors to voting proxies and ensures that any shift from a commission-based to a fee-based account qualifies as fiduciary advice, enhancing protection for individuals saving for retirement. 
• Effect of Acknowledgement of Fiduciary Status: The Final Rule prescribes that a person giving advice becomes a fiduciary by explicitly acknowledging they are acting as one under ERISA Title I, Title II, or both. This acknowledgment can occur in various ways, including directly mentioning ERISA or the Internal Revenue Code, ensuring flexibility and solidifying the advisor's fiduciary commitment. This provision is designed to prevent advisors from reneging on their fiduciary status through inconsistent statements or disclaimers that conflict with their other communications or actions. The rule ensures that if an advisor initially acknowledges fiduciary status but later issues a contradicting disclaimer, the original acknowledgment remains binding if it reflects the overall nature of their interactions, protecting the best interests of retirement savers under ERISA's standards.
• Defining Compensation in Fiduciary Investment Advice: The Final Rule defines "for a fee or compensation, direct or indirect," which is crucial for establishing fiduciary status under ERISA. This definition includes both direct fees, like express payments for advice, and indirect compensations such as commissions and markups directly related to the advice provided. The rule aims to include all forms of compensation linked to investment advice. This ensures that advisors act in the best interests of their clients, aligning with financial regulatory standards to enhance transparency and accountability.

Amendments to Prohibited Transaction Exemptions

In connection with the Final Rule, the DOL has also updated several Prohibited Transaction Exemptions (PTEs) to enhance the integrity of financial advice. Key among these are PTE 2020-02, available for a broad range of investment recommendations, and PTE 84-24, specifically designed for independent insurance agents. Both exemptions enforce Impartial Conduct Standards, mandating that advice must be prudent, loyal, and free from misleading statements, and that professionals should not prioritize their interests over those of retirement savers.

PTE 2020-02 allows fiduciaries to receive otherwise prohibited compensation provided they adhere to strict conditions that mitigate conflicts of interest and ensure advice impartiality. PTE 84-24 offers similar protections but is tailored to the unique role of insurance agents, requiring them to acknowledge their fiduciary status while still allowing insurance companies supervisory authority over their agents without fiduciary acknowledgment. Additionally, amendments to other PTEs, such as 75-1 and 77-4 among others, refine the conditions under which investment advice fiduciaries operate, standardizing conduct requirements to uniformly protect retirement investors across various financial transactions. 

Looking Ahead: Compliance and Impact of the New Fiduciary Rule

With a staggered compliance timeline generally requiring adherence by September 2024, the Final Rule underscores the DOL’s commitment to bolstering retirement security and ensuring that financial advisors prioritize clients' best interests. More broadly, the Final Rule is part of larger effort to allow for fair compensation for financial professionals while preventing conflicts of interest. As the rule takes effect, stakeholders should carefully review their current practices to ensure full compliance with the new regulatory landscape.