Question: I am a registered investment adviser who provides advisory services to individuals. How will the Department of Labor’s new fiduciary rule affect my business and when does it apply?
Answer: The new fiduciary rule, or officially the Retirement Security Rule, is effective September 23, 2024, and casts a wide net that could cause one-time recommendations about a retirement account to be considered a fiduciary act. If a recommendation covered under the new fiduciary rule causes you to receive compensation you would not have otherwise received, the compensation will be prohibited unless you comply with the conditions of a DOL Prohibited Transaction Exemption (PTE). Here are the top five facts you need to know about the new fiduciary rule:
1. The new fiduciary rule applies when you make a covered recommendation to a “retirement investor” under certain circ*mstances.
Fred Reish
The new fiduciary rule describes when you will be considered a fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) by virtue of making a covered recommendation to a retirement investor. “Retirement investor” is broadly defined to include a private sector tax-qualified retirement plan, an ERISA-governed retirement plan, a fiduciary of those plans, participants in those plans and IRA owners. Also, the term “IRA” covers individual retirement accounts as well as individual retirement annuities, health savings accounts, Archer medical savings accounts and Coverdell education savings accounts.
There are two circ*mstances under which you will be considered a fiduciary under the new fiduciary rule when providing a covered recommendation to a retirement investor. One is if you represent or acknowledge that status to the investor. The second is if you meet the following new test:
- You either directly or indirectly (e.g., through an affiliate) make professional investment recommendations;
- the recommendations are made to investors on a regular basis as part of your business;
- the circ*mstances under which the recommendation is made would indicate to a reasonable investor that the recommendation is based on review of the retirement investor’s particular needs or individual circ*mstances;
- the recommendation reflects the application of professional or expert judgement to the retirement investor’s particular needs or individual circ*mstances; and
- the recommendation may be relied upon by the retirement investor as intended to advance the investor’s best interest.
Joan Neri
As a registered investment adviser providing advisory services to individuals, it is likely that you will meet all five of these conditions when making a recommendation. This means that if you make a one-time covered recommendation (such as a rollover) and these five conditions are met, the recommendation will be considered fiduciary advice under the new fiduciary rule.
2. The new fiduciary rule covers recommendations about a broad range of services and products.
The new fiduciary rule covers recommendations about securities and other investment property, and it also covers a broad range of other recommendations including:
- Recommending a rollover or transfer from a plan or IRA, including advice about whether to engage in the rollover, the amount, the form and the destination;
- recommending how to invest property and securities rolled over or transferred from a plan or IRA – for example, even if no rollover recommendation is made, if you provide an investment allocation proposal for a rollover IRA to a retirement investor, it will be a covered recommendation;
- recommending how to invest plan or IRA distributions – for instance, recommending that a retirement investor use her plan distribution to purchase a life insurance policy;
- recommending investment policies or strategies;
- recommending portfolio composition – in other words, recommending an asset allocation is a covered recommendation;
- recommending an account type (e.g., advisory vs. brokerage);
- recommending another person to provide investment advice or investment management services; and
- proxy voting recommendations.
3. If you are providing fiduciary advice to a retirement investor with respect to ERISA plan assets, then the ERISA standard of conduct applies.
If you are a fiduciary under the new fiduciary rule and your recommendation is with respect to ERISA plan assets, then you will need to comply with the ERISA duties of prudence and loyalty. For example, if you recommend a rollover from an ERISA plan, you will need to ensure that your recommendation satisfies the ERISA duties of prudence and loyalty. If your recommendation is with respect to non-ERISA plan assets like IRA assets, then the ERISA standard does not apply – unless you need to rely on PTE 2020-02, in which case an ERISA-like standard will apply.
4. If your fiduciary advice results in compensation you would not have otherwise received absent the advice, then your compensation is prohibited unless you rely on a PTE.
Under both ERISA and IRC, a prohibited transaction arises if your fiduciary advice results in compensation that you would not have otherwise received. For instance, recommending a rollover to an IRA you manage results in an IRA management fee that you would not have received absent the rollover recommendation. To receive the IRA management fee, you will need to rely on PTE 2020-02 in order to avoid a prohibited transaction. PTE 2020-02 has a number of conditions, including a care and loyalty obligation that mirrors the ERISA duties of prudence and loyalty. The DOL’s amended PTE 2020-02 is effective September 23, 2024, at the same time as the new fiduciary rule; however, the effective date for some of the PTE’s conditions is September 23, 2025.
5. The new fiduciary rule does not apply to “hire me” discussions and education, as long as no covered recommendations are made during those discussions.
In the preamble, the DOL confirms that you can tout your own advisory services and provide other information (including information about your affiliates’ services) without being considered an advice fiduciary under the new fiduciary rule. However, the DOL explains that if you make a covered recommendation during those “hire me” meetings, then those recommendations will be subject to the new fiduciary rule. For example, if you are talking with an IRA owner about transferring his IRA to your firm, and if you provide a specific example of how you would manage his account if transferred, the DOL will likely view that as an investment recommendation, resulting in fiduciary status. That said, engaging in normal marketing activity by itself will not cause you to be a fiduciary under the new fiduciary rule.
The DOL also confirms that providing educational information and materials, such as those described in its current guidance found at Interpretive Bulletin 96-1, does not result in fiduciary status as long as no covered recommendation is made. For instance, providing objective general information to a retirement investor about the considerations for staying in a plan as compared to rolling into an IRA would not, by itself, constitute fiduciary advice.
Concluding Thoughts
The new fiduciary rule is not effective until September 23, 2024. During this period that precedes the effective date, you should review your current policies and practices, –e.g., hire me discussions, marketing materials, education materials, disclosures, to ensure that these communications and interactions with prospective clients will not cause you to be an advice fiduciary under the new fiduciary rule—or, if you will be an advice fiduciary, you will know that you need to comply with the conditions of PTE 2020-02.
