Lost amidst the hoopla of invalidated non-competes and overtime rules, the U.S. Department of Labor issued its long-awaited final fiduciary rule (the “Final Rule”) yesterday. The Final Rule is more limited in scope than the proposed rule announced in October, which we discussed here, and is likely to be scrutinized by the courts, as was the case with its 2016 predecessor. Nonetheless, the Final Rule is poised to reshape how retirement advice is provided, with substantial implications for employers navigating their fiduciary responsibilities.
Expansion of Definition of “Investment Fiduciary” under ERISA
Fiduciaries under the Employee Retirement Income Security Act of 1974 ("ERISA") have a legal duty to act in the best interests of retirement plan participants to whom they provide advice. The Final Rule makes it clear that fiduciary status applies to rollovers to individual retirement accounts ("IRAs") and annuity sales. Practically, this puts “trusted investment advice providers” and related financial institutions within the scope of the fiduciary duties imposed by ERISA when they offer investment-related advice in connection with rolling over account balances from employer-sponsored retirement plans to IRAs.
Prior to the Final Rule, such rollover transactions created the opportunity for the advisors to offer investment advice on a “one-time basis” outside of the scope of the fiduciary duties applicable to investment fiduciaries under ERISA. The Final Rule would close this loophole and require even one-time advice to be made in the best interest of the plan participant.
Differences from the Proposed Rule
Compared to the proposed rule, the Final Rule incorporates feedback from stakeholders during the commentary period and makes several key adjustments. One notable change is the expansion of the "carve-out" provision, which exempts certain interactions from fiduciary status. This expansion provides clarity on activities such as general education and marketing materials provided by human resource departments, alleviating concerns about inadvertently triggering fiduciary duties.
Additionally, the final rule offers more flexibility in how compensation arrangements are structured, allowing for greater innovation in fee models while still prioritizing client interests. Employers and advisors should carefully review these changes to understand their implications and ensure compliance with the revised requirements.
Conclusion
The Final Rule is almost certainly going to be tested in court, given its similarities to a prior 2016 DOL rule vacated by the U.S. 5th Circuit Court of Appeals in 2018. With that said, the Final Rule is the law of the land, with rolling effective dates as soon as September of this year. To that end, employers should (1) be mindful of the importance of ensuring that investment advisors or service providers meet fiduciary standards, placing greater emphasis on due diligence in selecting and monitoring these partners, and (2) confirm their understanding of the fees and compensation structures associated with their retirement plans to ensure they align with the best interests of plan participants.
