DOL Changes Fiduciary Rule Advice Definition Scope

Officials at the U.S. Department of Labor say they have narrowed the scope of the investment advice fiduciary definition.

Department officials posted a preview version of the final rule Tuesday. The final rule is set to go in the Federal Register, an official government regulatory publication, Thursday. If implemented as written, it will affect how regulators apply the Employee Retirement Security Act fiduciary requirements to people and companies that help retirement savers manage the assets in 401(k) plans and individual retirement accounts.

The American Council of Life Insurers, Finseca, the Insured Retirement Institute, the National Association of Insurance and Financial Advisors and other groups representing life insurance and annuity issuers, distributors and sellers have all expressed concern that the final rule is too similar to the draft released in October 2023, and officials of the groups have indicated that they are likely to fight the new definition in court and in Congress.

Labor Department officials contend that the revised version could address many life and annuity industry commenters' concerns that the definition could turn used-car salespeople or life insurance agency receptionists into accidental retirement plan fiduciaries.

A new paragraph in the final rule confirms that "sales pitches and investment education can occur without ERISA fiduciary status attaching," officials say in the rule's preamble, or official introduction.

Sales pitches come under the definition only if salespeople appear to be giving personalized investment recommendations that a retirement saver can rely on, officials say.

"The provision of investment information or education, without a recommendation, is not advice within the meaning of the final rule," officials add. "Nothing in the final rule requires mere sales pitches that fall short of the definition to be treated as fiduciary investment advice."

Officials also emphasize that they want retirement investment advice providers to put the savers' interests first but do not care whether the advice providers are paid with fees or commissions.

What it means: If the new retirement investment advice definition survives court challenges, congressional scrutiny and the impact of the upcoming presidential elections, the definition could prompt financial professionals to put more emphasis on whether they are advisors, who are subject to a fiduciary standard, or sales people, who are not trusted advisors and who are not subject to the standard.

The basics: The Employee Benefits Security Administration, a Labor Department agency, has been working on the definition since 2010.

The department received about 400 individual comments on the draft regulation and about 20,000 petition submissions.

The new final rule is set to take effect 150 days after the official Federal Register publication date.

Some industry groups have complained that the Labor Department rushed the regulation out, but the department says it met statutory requirements and robust input from affected parties.

The standard: Here is the text of the official Labor Department summary of the investment advice fiduciary definition:

Under the final rule, a person is an investment advice fiduciary if they provide a recommendation in one of the following contexts:

The person either directly or indirectly (e.g., through or together with any affiliate) makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation:

o is based on review of the retirement investor's particular needs or individual circumstances,

o reflects the application of professional or expert judgment to the retirement investor's particular needs or individual circumstances, and

o may be relied upon by the retirement investor as intended to advance the retirement investor's best interest; or

The person represents or acknowledges that they are acting as a fiduciary under Title I of ERISA, Title II of ERISA, or both with respect to the recommendation. The recommendation also must be provided "for a fee or other compensation, direct or indirect" as defined in the final rule.

The department noted that its view of whether a recommendation has been made will reflect how the U.S. Securities and Exchange Commission would rule in a case involving the SEC's Regulation Best Interest and whether there there has been a "call to action."

The scope: The new standard could affect any product with an investment component, including health savings accounts, but officials noted that a platform that simply helps people shop for and choose investment options, such as a mutual fund shopping platform or an HSA platform, likely would not come under the advice definition.

The National Association of Insurance Commissioners' model: The NAIC has tried to develop its own annuity sales standards.

Labor Department officials say it is not an adequate rule because it does not affect annuity advisors' compensation.

"The department acknowledges the comments from the NAIC expressing disappointment that the department coordinated with the NAIC staff rather than with the NAIC members prior to the proposed rule's publication and that the department did not share its intended approach in advance of public release of the proposal," officials said.

But the NAIC did provide substantive comments to the proposed rule after its release, and the department considered the comments carefully, officials said.\

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