While litigation (and other challenges) against the US Department of Labor’s (DOL’s) Retirement Security Rule is likely, its outcome is uncertain; therefore, impacted firms should consider approaches to implementation.
The DOL’s proposed Retirement Security Rule (also known as DOL Fiduciary Rule 4.0) brings back many concepts from its 2016 fiduciary rule, which was vacated by the US Court of Appeals for the Fifth Circuit. [1] In particular, the proposal includes
- an overly broad “investment advice” definition triggering fiduciary status in the retirement space;
- changes to force investment professionals to rely on the DOL’s preferred exemption, PTE 2020-02, which contains many more restrictive conditions generally not found in other exemptions; and
- strong enforcement mechanisms, including provisions that give the DOL oversight and authority over firms’ individual retirement account (IRA) business and (although DOL claims otherwise) a potential private right of action.
Key impacts of the rule are summarized below. Please contact us for our complete observations.
Proposed Definition of Investment Advice Fiduciary
- Fiduciary Presumption: Effectively creates a presumption of fiduciary status with respect to any interaction with a retirement investor.
- Rollovers: Challenges educational approaches to rollover interactions.
- Daisy-Chain of Fiduciary Entanglements: Brings institutional relationships and services into scope, including model managers, mutual fund wholesalers, private fund managers and distributors, investment platforms, and plan investment and services requests for proposal, but does not include any of the exceptions found in DOL Fiduciary Rule 2.0 (i.e., the 2016 version of the rule).
Proposed Amendments to PTE 2020-02
- Helpful Expansion: Broaden applicability to include digital advice and pooled plan providers of pooled employer plans.
- Private Right of Action: Require definitive fiduciary acknowledgment and statement of the best interest standard.
- Ever-Changing Principles-Based Standard: Put pressure on conflicts and conflict mitigation, including with respect to trips and educational conferences.
- Plaintiffs’ Bar Encouragement (Part 1): Enhance disclosure requirements, including adding disclosures available upon request and a potential website disclosure.
- Rollover Review Process Requirement: Apply rollover requirements to recommendations as to post-rollover investments currently held in a plan and add specific requirements for analysis to exemption conditions.
- Additional Encouragement to Correct Under PTE 2020-02: Bring corrections of non-exempt prohibited transactions and IRS Form 5330 excise tax filings in scope of annual retrospective review and ineligibility provisions.
- Additional Direct Oversight by the DOL: Significantly expand PTE 2020-02 ineligibility provisions to include a broader array of criminal convictions, including those of affiliates.
- Plaintiffs’ Bar Encouragement (Part 2): May require providing access to books and records to plan fiduciaries, contributing employers, plan participants and beneficiaries, and IRA owners.
Proposed Amendments to PTE 84-24
- Limit Use: Limit coverage of fiduciary investment advice transactions to “independent producers” selling insurance products and annuities that are not securities for a commission only (no third-party compensation).
- Harmonize with PTE 2020-02: Add PTE 2020-02 to conditions for independent producer exemptive relief.
Proposed Amendments to PTE 75-1, PTE 77-4, PTE 80-83, PTE 83-1, PTE 86-128
- Limit Use: Limit coverage to discretionary fiduciaries (non-discretionary/investment advice fiduciaries must rely on PTE 2020-02, PTE 84-24, or another exemption to continue receiving transaction-based or variable third-party compensation).
- Add Conditions to IRAs for PTE 86-128, Where Available: Add plan disclosure and authorization conditions (including portfolio turnover ratios) to requirements for IRAs and other non-ERISA plans under PTE 86-128.
- Limit Use: Eliminate relief for mutual fund transactions under PTE 75-1, Part II.
- Other: Make certain other changes to PTE 75-1, including recordkeeping requirements.