April 2024 Compliance

DOL Final Fiduciary Rule: Retirement Security Rule

On April 23, 2024, the U.S. Department of Labor (DOL) released the Retirement Security Rule, their final rule that redefines an investment advice fiduciary. The rule details when investment advice providers are acting in a fiduciary role. In addition, the DOL finalized several amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries. Below is a broad summary of the Retirement Security Rule and related PTE amendments.

Background

The Employee Retirement Income Security Act (ERISA) imposes certain requirements on fiduciaries of retirement plans and similar standards apply to individual retirement accounts (IRAs) under the Internal Revenue Code. Under these laws, fiduciaries have a duty to be prudent and loyal to investors and their beneficiaries as well as avoid conflicts of interest.

In 1975, the DOL provided a five-part test to determine whether someone was providing fiduciary investment advice to retirement savers. Under the five-part test, a person is considered a fiduciary if the investment advice is:

Recommending the purchase, sale, or value of securities or investment property for a fee,
Given on a regular basis,
Pursuant to a mutual agreement or understanding,
The primary basis for the investment decision, and
Individualized to the needs of the retirement saver.

When a fiduciary advisor gives investment advice, typically, the advisor must comply with a PTE for the advisor or their organization to receive compensation for the advice.

Investment Advice Fiduciary Defined

The Retirement Security Rule redefines an investment advice fiduciary as someone who receives compensation to make an investment recommendation to a retirement investor. A retirement investor includes a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA fiduciary. A retirement investor does not include financial professionals who make an investment recommendation to the retirement investor yet have no discretionary authority for investment decisions. To be considered investment advice, the recommendation needs to be given in one of the following contexts:

The person has discretionary authority or control to purchase or sell securities or other investment property for the retirement investor;
The person makes professional investment recommendations on a regular basis as part of their business, directly or through an affiliate, and the recommendation:
- would indicate to a reasonable investor that the recommendation is based on the review of the retirement investor’s needs or individual circumstances,
- reflects the application of professional or expert judgment to the investor’s needs or individual circumstances, and
- may be relied upon by the retirement investor as in their best interest; or
The person represents or acknowledges that they are acting as a fiduciary when making investment recommendations

Fiduciary status is determined on a transactional basis. Written statements disclaiming any fiduciary relationship will not apply if they are inconsistent with the person’s oral communications, marketing, or other interactions with the retirement investor.

Entities can offer a menu of investment options to fiduciaries for selection by participant-directed plans that are not customized or tailored to the retirement investor without the menu considered a recommendation. In addition, investment information or education, without a recommendation and indirect or direct compensation, is not advice under the rule.

PTE Amendments

The DOL finalized amendments to several existing PTEs that are applicable to investment advice fiduciaries. These changes are highlighted below:

PTE 2020-02

New required disclosures:
- Written statement of the duties of care and loyalty owed by the investment professional and their financial institution to the retirement investor.
- All material facts relating to the scope and terms of the relationship with the retirement investor, including material fees and costs.
Conflicts of Interest: Fiduciary advisors must update their policies and procedures to address incentives that might displace the retirement investor’s best interests.
Expanded availability to use this exemption for:
- Recommendations of any investment product, regardless of whether the product is sold on a principal or agency basis.
- Robo advice.
- Pooled Plan Providers (PPP) providing investment advice to Pooled Employer Plans (PEP); however, a PPP’s decision to hire an affiliated or related party as an advice provider is excluded.

PTE 84-24

The DOL amended PTE 84-24 to change the availability of the exemption and adds an additional section for independent insurance agents providing investment advice. This exemption is:

no longer available for investment advice fiduciaries who are not independent insurance agents and fiduciaries who have discretionary management of plan assets (they would generally have to use PTE 2020-02).
not available for specific investment advice involving ERISA plans transactions where the insurance agent, insurer, or any affiliate is the employer of the employees covered by the plan, or the plan’s named fiduciary or administrator.
available to independent insurance agents authorized to sell annuities that are not securities from two or more unrelated insurers to provide investment advice for annuity products (including rollovers); however, they must:
- Fully disclose their compensation,
- Comply with impartial conduct standards (like PTE 2020-02),
- Provide written statements of the DOL’s duties of care and loyalty, and
- Like PTE 2020-02's disclosure requirements regarding fiduciary status, fees, services, conflicts of interest, and a description of products they are licensed and authorized to sell, along with limitations.

PTEs 75-1, 77-4, 80-83, 83-1, and 86-128

In general, these PTEs are amended so that investment advice to ERISA plans or IRAs are excluded (they would generally need to use PTE 2020-02 or PTE 84-24). A high-level summary of each PTE is noted below:

PTE 75-1: Covers a variety of brokerage transactions, mutual fund purchases, underwriting transactions, and extensions of credit.
PTE 77-4: Covers a retirement plan or IRA’s purchase of an open-end mutual fund, discretionary transactions, and can be used to provide advice to a plan or IRA owner to purchase a proprietary mutual fund.
PTE 80-83: Allows security purchase when the proceeds may be used to retire or reduce a debt to the fiduciary.
PTE 83-1: Provides relief for the purchase of mortgage pool interests.
PTE 86-128: Covers brokerage transactions where a plan pays a fee for executing securities transactions.

Effective Date

The Retirement Security Rule and corresponding PTE amendments were published in the Federal Register on April 25, 2024, and are effective September 23, 2024, including the impartial conduct standards and fiduciary acknowledgement for the amended PTEs.

The new disclosure, policies, supervision, and retrospective review changes to PTE 2020-02 and PTE 84-24 have a one-year transition period from the effective date.

The subject matter in this communication is educational only and provided with the understanding that Principal^® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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