​Fiduciary Investment Advice

On December 18, 2020, the Department of Labor (DOL) finalized a best interest standard for investment advice fiduciaries in a new class exemption that was designed to align with the Security and Exchange Commission (SEC) standard of conduct on broker-dealers called Regulation Best Interest. The regulatory alignment idea is that, regardless of whether retirement investors choose broker-dealers or investment advisors, investors will be entitled to advice that is in their best interest. 

An account balance in an employee benefit plan can represent a lifetime of savings, and often, the largest sum of money a worker has at retirement. The decision to roll over ERISA-covered retirement plan assets to an Individual Retirement Account (IRA), which is not protected by ERISA, is a consequential financial decision for a plan participant. Both the DOL fiduciary exemption and the SEC final rule apply to rollover recommendations.

Fiduciary Investment Advice

The definition of a fiduciary under ERISA has fluctuated in the past decade. In 2016, DOL issued a rule redefining the meaning of the term fiduciary as it applies to investment professionals by replacing the five-part test originally specified in ERISA. In 2018, before the rule was fully in effect, a federal court vacated it on the grounds the DOL had overstepped its authority in writing the rule. Consequently, DOL reinstated the five-part test to determine whether a retirement investment advisor is acting as a fiduciary under ERISA and the Internal Revenue Code (IRC). 

What's the status right now?

DOL finalized the class exemption on December 18, 2020, adopted as "Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees." The existing five-part test originally spelled out in ERISA still applies to determine whether a retirement investment advisor is acting as an ERISA fiduciary. Investment advice fiduciaries relying on the new exemption would have to provide advice in the best interest of retirement investors. Investment advice fiduciaries also may be required to follow impartial conduct standards which would include a best interest standard; a reasonable compensation standard; a best execution standard and a requirement to make no materially misleading statements about recommendations. 

Investment advice rules have had a long history filled with ups, downs and mixed support. Support of this exemption is mixed as well. DOL intends to align fiduciary duties with respect to employee benefit plans under ERISA with the fiduciary duties of registered investment advisers under securities laws. On February 12, 2021, the DOL confirmed the effective date will go into effect as scheduled on February 16, 2021. 


Government Resources

Analysis


Regulation Best Interest

This standard requires a broker-dealer, when making a recommendation, to act in a retail customer's best interest and not place its own interests ahead of the customer's interests. It applies to any recommendations about securities transactions or investment strategies, including recommendations to roll over assets from a workplace retirement plan account to an IRA, and recommendations to take a plan distribution. The best interest standard, which has overcome a legal challenge, is not a fiduciary standard, but it includes features that are similar to features of the fiduciary standard for investment advisors.

Government Resources

Analysis


State Actions