The DOL’s Final Fiduciary Rule Is Here. See What’s Inside!

This week the Department of Labor unveiled its much-anticipated final fiduciary rule, set to take effect on September 23, 2024. This landmark rule aims to safeguard the interests of retirement savers by redefining the investment advice fiduciary under the Employee Retirement Income Security Act and the Internal Revenue Code.

The final rule is readily available on the DOL website, awaiting its official publication in the Federal Register on April 25, 2024. The rule's final language reflects feedback received during a brief comment period, offering insights into the changes made from the proposed rule. In short, it requires retirement investment advisors to provide prudent, loyal, and honest advice free from overcharges.

The rule places high expectations on fiduciaries to recommend investments that do not favor their interests over the retirement savers'. Additionally, financial institutions supervising these advisors are required to enforce policies and procedures that manage conflicts of interest and ensure adherence to these guidelines.

Over the past four decades, the DOL has navigated how ERISA's fiduciary duties of prudence and loyalty converge with beneficiaries' best interests. The rule was initially submitted for review by the Office of Management and Budget in early spring, with expectations set for a release shortly thereafter. By April 10, the rule had been cleared by the White House’s Office of Management and Budget, setting the stage for this week’s announcement.

The updated definition of fiduciary duty comes into effect on September 23, 2024. It covers cases where financial services providers offer paid investment advice to retirement plan participants, individual retirement account owners, and plan officials who manage plans and their assets.

What’s In The New Rule?

The rule aims to prevent advisors from prioritizing their interests over their clients', acknowledging that they deserve fair compensation for assisting retirement investors in pursuing their savings goals and retiring with dignity. It redefines fiduciary investment advice to include more types of advice, such as one-time advice about rollovers to IRAs or annuity purchases, thus broadening the definition of who is considered a fiduciary. It introduces a "trust and confidence" standard, replacing the previous five-part test, and applies not only to retirement plans but also to IRAs and HSAs.

Registered Investment Advisers have consistently been held to a fiduciary standard since the Investment Advisers Act of 1940, making the new fiduciary rule largely redundant for them as it enforces an obligation they already meet. The rule, however, significantly affects brokers, who were long held to a less stringent suitability standard that did not prioritize the client's best interests to the same degree. This marks a notable shift, elevating brokers' responsibilities to align more closely with the fiduciary standards long embraced by RIAs.

Previously, certain types of plan-level advice were not covered under the SEC’s Regulation Best Interest. The new rule effectively closes this gap by ensuring that fiduciary responsibilities are uniformly applied across all forms of investment advice related to retirement plans. This adjustment is crucial in standardizing the level of protection afforded to investors, aligning it more closely with the stringent standards expected in other areas of financial advice.

This change subjects them to stringent ERISA enforcement provisions, which notably include a private right of action. Consequently, they face increased legal risks; non-compliance with fiduciary standards could lead to class action lawsuits if their advice deviates from their duty to the client.

"America's workers and their families rely on investment professionals for guidance as they save for retirement," said Acting Labor Secretary Julie Su in a press release. "This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions."

With this rollout, the Biden-Harris administration highlight recent analysis by the Council of Economic Advisers showing that conflicted advice on a single investment product—fixed index annuities—could cost savers up to $5 billion per year. Such conflicts can diminish retirement investors' returns and incur expenses that erode workers' savings.

The rule also facilitates fair competition among investment professionals by addressing discrepancies in the standards applied to advice providers based on the products they recommend. Firms and investment professionals acting in the best interest of retirement investors should not face penalties for responsibly managing their conflicts of interest and making prudent and loyal recommendations.

The DOL press release acknowledges that the current definition of investment advice fiduciary, adopted in 1975, was crafted in a time when individual retirement accounts were less common, and 401(k) plans did not exist. In today's world, individual plan participants and IRA owners are expected to make important, complex financial decisions.

"These new rules update regulations created nearly a half-century ago that simply are not providing the protections America's workers need and deserve for their retirement savings so that they can retire with dignity," said Assistant Secretary for Employee Benefits Security Lisa M. Gomez in the DOL’s press release. "The investment landscape has changed, the retirement landscape has changed, and it is critical that our regulations are responsive to those changes so that workers can reach the secure retirement that they work for decades to finally achieve."

The DOL’s newly unveiled fiduciary rule signifies a significant development in the protection of retirement savers' interests. The rule establishes higher standards for investment advisors, mandating honest and prudent advice while mitigating conflicts of interest. By aligning regulations with contemporary retirement and investment landscapes, the rule aims to foster fair competition and provide workers with the tools to make impartial, well-informed decisions as they pursue confident retirements.

Brian Menickella is the founder and managing partner at Beacon Financial Services, a broad-based financial advisory firm based in Wayne, PA.

Securities and Advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.

Fixed Indexed Annuities (FIA) are not suitable for all investors. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. No investment strategy assures a profit or protects against loss.