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DOL Prepares to Issue Rule Requiring More Financial Professionals to Act as Fiduciaries

S.J. Steinhardt
Published Date:
Mar 26, 2024


The U.S. Labor Department (DOL), which regulates retirement plans, is preparing to release a final rule that would require more financial professionals to act as fiduciaries, The New York Times reported.

The rule means that these professionals will be held to the highest standard when providing advice on retirement money held or destined for tax-advantaged accounts, such as individual retirement accounts (IRAs).

Under the 1974 Employee Retirement Income Security Act (ERISA), most retirement plan administrators who oversee the trillions of dollars held in 401(k) plans are already held to this standard. ERISA was enacted to oversee private pensions; 401(k)s did not exist at the time. But ERISA does not generally apply when workers roll money into an IRA when they leave a job or retire from the work force. Nearly 5.7 million people rolled $620 billion into IRAs in 2020, according to the latest IRS data.

The final regulation, which will be released this spring, is expected to change that, as investment professionals selling retirement plans and recommending investment menus to businesses would also be held to a fiduciary standard, as would professionals selling annuities inside retirement accounts.

“It shouldn’t matter whether you’re getting advice on an annuity, any kind of annuity, a security—if it’s advice about your retirement, that should have a high standard that applies across the board,” said Ali Khawar, the DOL's principal deputy assistant secretary of the Employee Benefits Security Administration.

Currently, it is easier to avoid fiduciary status under ERISA. Investment professionals must meet a five-part test before they are held to that standard, and one component states that professionals must provide advice on a regular basis. That means that if a financial professional makes a one-time recommendation, that person does not have to be held to the higher standard—even if the advice was to roll over someone’s lifetime savings.

The proposed rule would require more financial professionals to act as gold-standard fiduciaries when they’re making an investment recommendation or providing advice for compensation, according to the Times.

Despite improvements in investor protections, there is no universal standard for all advisers, investment products and accounts.

Stakeholders in the financial services and annuities industries say the current standards, including the Regulation Best Interest (Reg BI), which requires brokers to act in their customers’ best interests when making securities recommendations to retail customers, are enough.

Reg BI “requires all financial professionals subject to the Securities and Exchange Commission (SEC)’s jurisdiction to put their clients’ interest first—to not make recommendations that line their own pockets at the expense of their client,” said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute, during a House hearing about the rule in January.

But there are differences between the different best interest standards and ERISA fiduciary status.

One financial services firm, Janney Montgomery Scott, said on its website that fiduciary status was “highly technical” when it came to retirement and other qualified accounts and depended on the services chosen. “Unless we agree in writing, we do not act as a ‘fiduciary’ under the retirement laws,” the firm said, referring to ERISA, “including when we have a ‘best interest’ or ‘fiduciary’ obligation under other federal or state laws.”

“It would be unreasonable to expect ordinary retirement investors to understand the implications of these disclosures,” said Micah Hauptman, director of the Consumer Federation of America, a nonprofit consumer association, in an interview.

The latest proposed rule provides that fiduciaries must avoid conflicts of interest. That means that they can’t provide advice that affects their compensation, unless they meet certain conditions to ensure that investors are protected. Such conditions include putting policies in place to mitigate those conflicts. Just disclosing conflicts isn’t enough, department officials said.

Kamila Elliott, the founder and chief executive of Collective Wealth Partners, a financial planning firm in Atlanta whose clients include middle-income to high-earning Black households, testified at a congressional hearing in favor of the proposed rule. A certified financial planner, she said she had seen the effects of inappropriate advice through her clients, who came to her after working with annuity and insurance brokers.

Jason C. Roberts, chief executive of the Pension Resource Institute, a consulting firm for banks, brokerage and advisory firms, said he expected that financial services providers would need to change certain policies to adhere to the new rule. “It’s really going to hit the broker-dealers,” he said in an interview, adding that parts of the annuity industry may be more affected.

DOL officials told the Times that they took industry stakeholder and others comments into consideration when drafting the final rule, although they declined to provide details.

The final rule could be published as soon as next month, though legal challenges are expected.

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