On Oct. 31, 2023, the Biden administration released its long-awaited revision to the Employee Retirement Income Security Act (ERISA) fiduciary rule. These regulations define fiduciaries and outline what transactions are covered by fiduciary guidelines. The administration claims that these new guardrails will close loopholes that force Americans to earn less on their investments, especially their retirement savings. Industry members, on the other hand, have called the restrictions overly broad and will limit the products they can offer investors and harm their businesses.
Fiduciary Rule History
The history of fiduciary responsibility extends back to the Employee Retirement Income Security Act of 1974 (ERISA) and involves a complicated tangle of regulatory action and legal involvement. The recently announced rule, though, draws most of its background from the Obama administration’s attempt to establish a similar rule in 2016. The main focus of that 2016 rule was to redefine the five-part test that defined an investment-advice fiduciary with broader rules that covered far more individuals and put many formerly unrestricted transactions under scrutiny. Two years later, in 2018, the Fifth Circuit Court of Appeals vacated this rulemaking in Chamber of Commerce v. U.S. Department of Labor, finding that the Department of Labor (DOL) overstepped its authority in changing the definition of fiduciaries in the previous method.
In 2020, DOL released guidance in another attempt to place exemptions that would increase the responsibilities of fiduciaries. These guidelines were an attempt to bring DOL guidance more in line with the Securities and Exchange Commission’s Best Interest Regulation and the National Association of Insurance Commissioners’ Suitability in Annuity Transactions Model Regulation.
The Biden administration did not reverse the 2020 guidance, but issued additional guidance in 2021, which, among other things, expanded the circumstances when rollover recommendations could satisfy the regular basis test triggering fiduciary status for the financial advisor. The 2021 rollover portion of the guidance was vacated earlier this year by a federal court in Florida as being inconsistent with the existing 1975 fiduciary regulation. ASA v. Walsh, No. 8:22-cv-00330 (M.D. Fla., 2023)
The rule would expand the application of existing fiduciary standards, which commonly covers investment advice to retirement investors regarding the purchase of securities-like mutual funds, to include advice on the purchase of non-securities-like investments (e.g., fixed index annuities), advice to employers and plan fiduciaries, and advice to retirement plan participants on one-time transactions like 401(k) rollovers to IRAs. The rule broadly imposes the uniform application of the “best interest standard” and ERISA fiduciary standards to any retirement investment product.
This proposed fiduciary definition would apply to recommendations to roll over assets from a workplace retirement plan to an IRA if every element of the proposed fiduciary definition is satisfied.
The Biden administration also is proposing that the treatment of independent insurance agents who recommend fixed index annuities should be aligned with the treatment of other types of financial advisors. This treatment would also apply to the sales teams of captive insurers.
For the first time, the rule will specifically address “hidden charges” and “junk fees,” a continuation of a focus of other recent actions by the White House.
The proposed rule includes a 60-day period for public comments and a public hearing at the U.S. Department of Labor that will be scheduled in approximately 45 days.
While there already have been some reactions in the financial and retirement industries to the introduction to the update retirement investment advice rules, we think it is important for the administration to hear from many others impacted by this rule. Please let us know if you would like more information about the new rules and the related revisions to several prohibited transaction exemptions, or if you would like to file comments.
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