The U.S. Department of Labor finalized its Retirement Security Rule, designed to protect workers who are saving for retirement and who rely on advice from trusted professionals on how to invest their savings. This final rule will achieve this by updating the definition of an investment advice fiduciary under the Employee Retirement Income Security Act and the Internal Revenue Code.

The final rule and related amendments prohibit certain transaction exemptions and require more investment advice providers to give prudent, loyal, honest advice free from overcharges.

Fiduciaries must adhere to high standards of care and loyalty when they recommend investments and avoid recommendations that favor the investment advice providers' interests — financial or otherwise — at the retirement savers' expense. Under the final rule and amended exemptions, financial institutions overseeing investment advice providers must have policies and procedures to manage conflicts of interest and ensure providers follow these guidelines.

The updated definition of an investment advice fiduciary, effective Sept. 23, 2024, applies when trusted financial services providers give compensated investment advice to retirement plan participants, individual retirement account owners, and plan officials responsible for administering plans and managing their assets.

The department has also amended related existing administrative prohibited transaction class exemptions that are available to investment advice fiduciaries. The amendments make the exemption conditions more uniform and protective. Under ERISA and the Code, investment advice fiduciaries must avoid conflicts of interest or comply with an exemption's conditions to receive compensation that otherwise would be prohibited. The amended exemptions require investment advice fiduciaries to provide retirement investors with advice that is prudent, loyal, honest, and free from overcharges. "Biden-Harris Administration Announces Rule To Protect Retirement Savers' Interests By Updating Investment Advice Fiduciary Definition" www.dol.gov (Apr. 25, 2024).

Commentary

In 2016, the DOL first attempted to revise the original 1975 test of who is considered a fiduciary; however, that rule was overturned in a 2018 Fifth Circuit, U.S. Court of Appeals case that held that the rule was too broad and the DOL had overstepped its authority.

This most recent version of the rule has been under consideration since it was first proposed on October 31, 2023, by the U.S. Department of Labor (DOL). The new rule significantly expands the scope of advisors treated as ERISA fiduciaries.

Under the rule, an advisor will be considered an "investment advice fiduciary" under ERISA if all of the following three statements are true:

1.      The advisor provides investment advice or makes an investment recommendation to a retirement investor.

2.      The advice or recommendation is provided for a fee or other compensation.

3.      The advice or recommendation is made in the context of a professional relationship in which an investor would reasonably expect to receive sound investment advice or recommendations that are in his or her best interest

Moreover, one of the following four conditions must also be true:

1.      The advisor has discretion over investment decisions for the retirement investor.

2.      The advisor makes investment recommendations to investors on a regular basis as part of their business.

3.      The recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied on by the retirement investor as a basis for investment decisions that are in the retirement investor's best interest.

4.      The advisor states that the advisor is acting as a fiduciary when making investment recommendations.