What’s an “Investment Advice Fiduciary”?

This past April, the U.S. Department of Labor (DOL) published a final rule re-defining when a person is an “investment advice fiduciary” for purposes of the Employee Retirement Income Security Act (ERISA). ERISA governs workplace employee benefit plans, such as pension plans and 401(k) plans, along with other types of retirement savings plans, such as individual retirement accounts (IRAs). The rule’s effective date is September 23, 2024.

The final rule primarily targets financial advisers, insurance agents and brokers, and asset managers. However, credit unions that are ERISA-covered retirement plan sponsors should also be aware of any changes coming down the pike. The amended rules could potentially mean updated policies, service models, agreements, and/or recordkeeping requirements for some providers.

But before we go any further, readers should note that the fate of this rulemaking is a bit uncertain at the moment. Like the agency’s 2016 fiduciary rule (overturned by the 5th Circuit in 2018), this final rule is already facing federal lawsuits (for example) and receiving pushback on Capitol Hill. With that disclaimer, here are some fiduciary rule basics for your consideration.

What is an “investment advice fiduciary”?

Under DOL’s current definition, a person is a fiduciary if: (1) they render advice 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) on a regular basis and (3) pursuant to a mutual agreement, arrangement or understanding with the plan or a plan fiduciary; (4) the advice serves as a primary basis for investment decisions with respect to plan assets; and (5) the advice is individualized based on the particular needs of the plan.

So, why the change? According to DOL, the current definition excludes one-time advice, such as a one-time recommendation to roll over assets from a workplace retirement plan to an IRA, which wasn’t an issue when the agency promulgated its 1975 rule (pre-401(k) plans). The 2024 amendments seek to close this “one-time advice loophole” in the rule.

The amended definition provides that a person will be an investment advice fiduciary under ERISA if they provide investment advice or make an investment recommendation to a “retirement investor” (a plan, plan fiduciary, plan participant or beneficiary; IRA, IRA owner or beneficiary; or IRA fiduciary) for a fee or other compensation, direct or indirect, and:

• The person either directly or indirectly makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation:
  • Is based on review of the retirement investor’s particular needs or individual circumstances,
  • Reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and
  • May be relied upon by the retirement investor as intended to advance the retirement investor’s best interest; or
• The person represents or acknowledges that they are acting as a fiduciary under Title I of ERISA, Title II of ERISA, or both with respect to the recommendation.

Still a lengthy definition, but you’ll see that the language regarding providing investment advice “pursuant mutual agreement, etc.” was removed. Therefore, if every element of this new definition is satisfied, a financial services provider will be an investment advice fiduciary — including with respect to a one-time recommendation to roll over assets from a 401(k) to an IRA.

The DOL also amended certain class “prohibited transaction exemptions” (PTEs) available to investment advice fiduciaries. These amendments also generally take effect on September 23, 2024, although there is a one-year transition period after the effective date for certain conditions in the PTEs.

In particular, PTE 2020-02 allows investment advice fiduciaries to receive compensation that would otherwise be prohibited by law, as long as the fiduciaries comply with certain conditions. The exemption requires that investment recommendations adhere to Impartial Conduct Standards, for example: the advice must meet obligations of care and loyalty, providers must charge reasonable fees and comply with federal securities laws, and advice must be free from misleading statements.

This is obviously just a snapshot of the final rule for informational purposes only. Retirement plan sponsors should keep an eye out for any communications from their plan vendors regarding any updated policies and/or agreements, as needed.