The Department of Labor recently announced its final fiduciary rule, set to take effect on September 23, 2024. This rule aims to protect the interests of retirement savers by redefining the investment advice fiduciary under ERISA and the Internal Revenue Code. Although the rule will officially appear in the Federal Register on April 25, 2024, it is already available on the DOL website. The rule requires retirement investment advisors to provide prudent and loyal advice free from overcharges, with financial institutions overseeing these advisors expected to enforce policies and procedures that manage conflicts of interest.
The rule aligns with the ERISA’s fiduciary duties of prudence and loyalty by requiring fiduciaries to recommend investments that do not favor their interests over the retirement savers’. It was submitted for review by the Office of Management and Budget and ultimately cleared by the White House’s Office of Management and Budget, paving the way for its recent announcement. The updated definition of fiduciary duty, which comes into effect in September 2024, covers cases where financial services providers offer paid investment advice to retirement plan participants, individual retirement account owners, and plan officials managing plans and assets.
The new rule redefines fiduciary investment advice to cover one-time advice about rollovers to IRAs or annuity purchases, broadening the definition of who is considered a fiduciary. It replaces the previous five-part test with a “trust and confidence” standard and applies not only to retirement plans but also to IRAs and HSAs. The rule particularly affects brokers, who were previously held to a less stringent suitability standard, as it now elevates their responsibilities to align more closely with the fiduciary standards embraced by RIAs. This change subjects them to ERISA enforcement provisions, increasing potential legal risks if they fail to comply with fiduciary standards.
The rule aims to prevent advisors from prioritizing their interests over their clients’ and ensures fair compensation for assisting retirement investors in pursuing their savings goals. It acknowledges that retirement investors deserve to trust that their advisors are working in their best interests and helping them make unbiased decisions. The rule also standardizes the level of protection afforded to investors across all forms of investment advice related to retirement plans, closing previous gaps in fiduciary responsibilities. Acting Labor Secretary Julie Su emphasized that the rule was essential for protecting retirement investors from improper advice and conflicts of interest, allowing them to make unbiased decisions in their financial planning.
The Biden-Harris administration supports this rule, citing analysis showing that conflicted advice on fixed index annuities could cost savers up to $5 billion annually. By implementing the fiduciary rule, the DOL aims to create fair competition among investment professionals and provide workers with the tools needed to make impartial, well-informed decisions on their retirement savings. The DOL press release notes that the previous definition of investment advice fiduciary, established in 1975, needed updating to reflect the changing retirement and investment landscapes, allowing workers to reach a secure retirement with dignity. Assistant Secretary for Employee Benefits Security Lisa M. Gomez emphasized the importance of regulations that protect workers’ retirement savings in today’s complex financial environment.
The DOL’s new fiduciary rule signifies a significant step towards protecting retirement savers’ interests by establishing higher standards for investment advisors. By mandating honest and prudent advice while mitigating conflicts of interest, the rule aims to empower workers to make well-informed decisions as they prepare for retirement. By aligning regulations with contemporary retirement and investment landscapes, the rule aims to foster fair competition and provide workers with the tools they need to pursue confident retirements.
