On April 23, 2024, the U.S. Department of Labor took significant steps to redefine the landscape of retirement investment advice through the release of the Retirement Security Rule. This regulation redefines who qualifies as an investment advice fiduciary under the Employee Retirement Income Security Act.
These changes—set to take effect on Monday, Sept. 23, 2024, with a one-year transition period for specific provisions—expand the definition of investment advice fiduciary to include many financial professionals.
Background
ERISA is a federal law that oversees employee benefit plans, including pension plans, 401(k) plans, and other types of retirement accounts like individual retirement accounts. ERISA imposes strict requirements on plan fiduciaries, including those who qualify as fiduciaries by providing investment advice for a fee.
Retirement investors commonly depend on investment professionals—such as brokers, insurance agents and registered investment advisers—for guidance on investing their retirement savings. Typically, these professionals present themselves as experts offering personalized advice aligned with the investor’s best interests.
Current rule
Prior to adoption of the final rule, a person was considered to be providing investment advice if he or she received direct or indirect compensation for rendering advice or making recommendations as to investing in, purchasing or selling securities or other property.
The advice must have been provided on a regular basis pursuant to a mutual agreement, arrangement or understanding with the retirement investor, that the advice will serve as a primary basis for investment decisions and the advice will be individualized based on the particular needs of the ERISA plan or IRA.
The changes
The DOL has expanded the definition of “investment advice” in the context of the ERISA.
The department’s final rule provides that a financial services provider will be an investment advice fiduciary under federal law if:
- the provider makes an investment recommendation to a retirement investor;
- the recommendation is provided for a fee or other compensation, such as commissions; and
- the financial services provider holds itself out as a trusted adviser by specifically stating that it is acting as a fiduciary under ERISA; or
- the provider makes the recommendation in a way that would indicate to a reasonable investor that the provider is acting as a trusted adviser making individualized recommendations based on the investor’s best interest.
By including transactions in which financial advisers hold themselves out be to be fiduciaries, the new rule effectively holds financial advisers to a fiduciary standard regardless of whether their contact with a client is on a regular basis. In other words, the new rules can and will apply to one-time transactions such as retirement plan rollovers—which were not included before.
Fiduciary standard
Under the heightened fiduciary standard, financial advisers will have to meet a duty of loyalty and a duty of care.
The duty of loyalty requires financial advisers to prioritize the interests of their clients before their own, avoiding potential conflicts of interest that may impact their ability to make good decisions.
The duty of care requires financial advisersto make decisions prudently and in good faith. This duty can be explicitly stated in contract, or it can be an understanding between the adviser and consumer, but it essentially requires professionals to exercise good judgment and make informed decisions.
Essentially, financial advisers must act in the best interest of their clients by:
- never putting their financial interests ahead of the retirement investor’s when making recommendations;
- avoiding misleading statements about conflicts of interest, fees and investments; and
- charging no more than what is reasonable for their services, and giving the retirement investor basic information about the adviser’s conflicts of interest.
Bradford J. Lachut, Esq.
Bradford J. Lachut, Esq., joined PIA as government affairs counsel for the Government & Industry Affairs Department in 2012 and then, after a four-month leave, he returned to the association in 2018 as director of government & industry affairs responsible for all legal, government relations and insurance industry liaison programs for the five state associations. Prior to PIA, Brad worked as an attorney for Steven J. Baum PC, in Amherst, and as an associate attorney for the law office of James Morris in Buffalo. He also spent time serving as senior manager of government affairs as the Buffalo Niagara Partnership, a chamber of commerce serving the Buffalo, N.Y., region, his hometown. He received his juris doctorate from Buffalo Law School and his Bachelor of Science degree in Government and Politics from Utica College, Utica, N.Y. Brad is an active Mason and Shriner.
