On April 23, 2024, the Department of Labor (DOL) announced a significant overhaul to the Retirement Security Rule that strengthens fiduciary responsibilities for financial advisors dealing with retirement plans and IRAs. This comprehensive update to the fiduciary definition under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code is scheduled to take effect on September 23, 2024, marking a major shift in how retirement investment advice is regulated.
Previously, the definition of a fiduciary was narrowly tailored, often excluding advisors providing one-time advice on crucial financial decisions like IRA rollovers. The revised rule broadens this definition to include any compensated financial advice, ensuring all such guidance adheres to fiduciary standards, whether provided occasionally or as part of a regular advisory relationship.
Extended Scope and Updated Standards
The new rule introduces significant changes to the obligations of investment professionals:
- Broadened Fiduciary Definition: Advisors are now fiduciaries if their advice is based on individual client needs and can be reasonably relied upon as being in the client’s best interest. This includes recommendations on retirement rollovers and annuity purchases, areas previously perceived to have conflicts of interest.
- Staggered Implementation Dates: While the fiduciary rule takes effect in 2024, specific requirements, particularly around exemptions and detailed reporting, will not be mandatory until September 2025. This staggered approach allows financial institutions time to adapt to the new regulatory landscape.
- Clarifications and Simplifications: Responding to industry feedback, the DOL has streamlined the fiduciary test, focusing on the relationship and communications with the investor and the explicit acknowledgment of fiduciary status by the advisor, removing previous criteria that were less relevant to modern financial advising practices.
Enhanced Consumer Protections and Industry Implications
The rule also updates and harmonizes the prohibited transaction exemptions (PTEs), such as PTE 84-24, aligning them with other regulatory standards like the SEC’s Regulation Best Interest. These updates ensure that all fiduciaries, which could include insurance agents selling annuities, adhere to consistent and stringent standards of care.
At the National Association of Plan Advisors’ 401(k) Summit*, Assistant Secretary Lisa Gomez highlighted the need for these changes, noting the disparity in fiduciary standards across different investment products and advising scenarios. The updated rule aims to eliminate these inconsistencies, ensuring a level playing field where the quality of advice, rather than the type of product recommended, dictates an advisor’s competitive edge. 1
Despite its benefits, the rule has faced opposition from various sectors of the financial industry, concerned about the potential for increased regulatory burdens and associated costs. Critics argue that the rule might restrict access to financial advice for lower-income individuals who may not afford the fees required under the new fiduciary standards.
Looking Forward
The DOL anticipates potential legal challenges to the new rule, akin to those encountered by previous iterations under different administrations. However, officials express confidence that the rule’s focus on clear, trust-based advisory relationships will withstand scrutiny, emphasizing the rule’s alignment with both legal precedents and congressional mandates.
As the rule heads towards implementation, it aims to reshape the retirement planning landscape, helping retirees receive investment advice that is not only expert but also unequivocally in their best interests. This pivotal update reflects a broader shift towards greater transparency and accountability in financial advising, promising a safer, more equitable future for America’s retirees.
See the Updated Rule here:
Retirement Security: Definition of an Investment Advice Fiduciary https://www.regulations.gov/document/EBSA-2023-0014-19234
*National Association of Plan Advisors’ 401(k) Summit, Nashville, TN on April 7, 2024
1 https://www.napa-net.org/news-info/daily-news/breaking-department-labor-releases-final-investment-advice-fiduciary-rule. April 23, 2024
© 2024 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment adviser does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.
Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.
