DOL Finalizes Fiduciary Rule

The Department of Labor (DOL) on April 23 finalized the long-awaited fiduciary rule, which aims to modernize and increase investment advice standards for retirement accounts.

The rule, called the Retirement Security Rule: Definition of an Investment Advice Fiduciary, updates the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code so that providers adhere to “high standards of care and loyalty” when recommending investments. It ensures that financial advisors, brokers and insurance agents are held to the fiduciary standard on rollover individual retirement accounts.

The rule will take effect on Sept. 23. It was originally proposed in October.

“The final rule and related amended prohibited transaction exemptions require trusted investment advice providers to give prudent, loyal, honest advice free from overcharges,” the DOL said in a statement. “These fiduciaries must adhere to high standards of care and loyalty when they recommend investments and avoid recommendations that favor the investment advice providers’ interests—financial or otherwise—at the retirement savers’ expense.”

The rule applies a best interest standard to advice that plan sponsors receive about which investments to include in 401(k) and other employer-sponsored plan lineups. The rule, however, clarified that human resource professionals will not be interpreted as giving professional advice when they discuss general aspects of the retirement plan a company provides.

It also “ensures investment professionals can compete for business on a level playing field, instead of being hindered by a skewed system in which different standards exist for advice providers based on the products they recommend,” the DOL said.

Acting Labor Secretary Julie Su said the 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.”

The DOL noted that the update is necessary because the current definition of an investment advice fiduciary, adopted in 1975, was written when individual retirement accounts were less common and before 401(k) plans existed. At that time, most workers relied on pension plans.

Jason Levy, of counsel at law firm Covington, told SHRM Online last fall when the rule was proposed that the rule may impose unintended consequences on employer plan fiduciaries.

For example, a key focus of the rule is to capture rollover recommendations as fiduciary investment advice, which would “impose new obligations on many service providers whose rollover communications will be subject to the fiduciary standard,” he said. “However, the rule does not provide clarification as to employer plan fiduciaries’ obligations with respect to monitoring such rollover communications.”

Before the rule is published in the Federal Register, it can be found on the DOL’s website.