The U.S. Department of Labor’s (DOL) final regulations broaden the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) to include more investment advisors. However, the eight hundred pages of final regulations, which consist of a final rule and three sets of amendments to ERISA prohibited transaction exemptions, contain crucial differences from the proposed regulations. Therefore, despite the significant expansion contained in the rule, the DOL did retreat from some of its original proposals.
First, the final rule eliminates the loophole that contained an explicit exemption for one-time advice, such as advice related to rollover transactions. The rule accomplishes this change by removing the so-called “regular basis” prong from the 1975 five-part test for determining ERISA fiduciary status when giving investment status. Now, unless an ERISA transaction exemption applies, even a one-time rollover advice transaction is subject to fiduciary standards under ERISA – although the one-time advice goes beyond rollovers. In conjunction with this change, DOL also significantly amended many ERISA transaction exemptions, including PTE 2020-02, which many financial firms utilize when recommending rollovers for a fee.
Next, the DOL extended the final rule’s effective date and the compliance period from its original proposal. Their original proposal called for a 60-day compliance period. In contrast, most provisions in the final rule take effect on September 23, 2024, which is 150 days. Some changes in the transaction exemptions provide an extra year to meet certain conditions.
Furthermore, the DOL removed several requirements from its original proposal. For example, the DOL’s October proposed rule required financial institutions, insurers, and others who utilize certain ERISA-prohibited transaction exemptions to disclose compensation arrangements online publicly.
The DOL also changed its original test design to determine whether a “recommendation-for-a-fee” transaction is subject to ERISA’s fiduciary duties. The proposed rule would have included a discretion-focused prong, which asked whether the advice provider, either directly or indirectly, had discretion or control over the invested retirement assets.
Finally, DOL’s final draft of the rule clarified that the expanded fiduciary definition under ERISA, which includes investment advice, does not include human resources staff giving educational information about retirement plans or sales pitches. Plan sponsors had advocated for an independent fiduciary exception, such as the DOL had articulated in 2016 that the U.S. Court of Appeals for the Fifth Circuit struck down. However, the DOL addressed the matter with a simple clarification to avoid one of the carve-outs that the Fifth Circuit had specifically criticized in its decision.
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