Update: DOL Delays Enforcement Until 2022
The Department of Labor (DOL) announced on Oct. 25, 2021, in Field Assistance Bulletin No. 2021-02, it would not pursue claims against investment advisors acting "diligently and in good faith" to comply with new Prohibited Transaction Exemption 2020-02 through Jan. 31, 2022, regarding advice on how to invest assets within a plan.
The DOL also said it would not enforce specific documentation and disclosure requirements for giving advice on rollovers from 401(k) plans to individual retirement accounts through June 30, 2022. Other requirements of the exemption, however, will be subject to full enforcement as of Feb. 1, 2022.
The exemption became effective on Feb. 16, 2021, but the DOL had provided transitional relief through Dec. 20, 2021. Financial services companies that provide investment advice had requested additional time to comply with the new requirements.
See the SHRM Online article DOL Delays Enforcement of Investment Advice Rule Until 2022.
The U.S. Department of Labor's Employee Benefits Security Administration allowed a controversial Trump administration final rule on providing investment advice to retirement plan participants to take effect as scheduled on Feb. 16, surprising those who believed the Biden administration was likely to block the new regulation, which allows advisors to receive payments from mutual funds they recommend.
The guidance, Prohibited Transaction Exemption 2020-02—Improving Investment Advice for Workers & Retirees, addresses fiduciary requirements under the Employee Retirement Income Security Act (ERISA) for professionals who recommend investments to participants in 401(k) or similar employer-sponsored plans and to individual retirement account (IRA) holders. It is less restrictive than a 2016 regulation by the Obama administration, which was struck down in 2018 by the 5th U.S. Circuit Court of Appeals when it held that the regulations exceeded the DOL's rulemaking authority and failed to meet reasonableness requirements, among other issues.
The new guidance was proposed in July 2020, and the final rule was published in December.
Allowing fiduciary advisors to receive compensation directly from mutual fund companies, albeit with certain restrictions, means participants don't pay out of their own pocket for advice, which might otherwise be unaffordable for them, supporters of the new guidance said. Critics contended that allowing third-party payments to advisors raised concerns about participants receiving conflicted advice that is not in their best interest.
After it was proposed, the rule was targeted by progressives, such as Sen. Elizabeth Warren, D-Mass., who favored the Obama administration's more restrictive approach. The 2020 Democratic Party platform said a Biden administration would "take immediate action to reverse the Trump administration's regulations allowing financial advisors to prioritize their self-interest over their clients' financial well-being."
Ali Khawar, deputy assistant secretary of labor for the Employee Benefits Security Administration, said in a statement: "This exemption allows for important investor protections, including a stringent 'best interest' standard of care for fiduciary recommendations of rollovers from ERISA-protected retirement accounts," such as advice to transfer funds from a 401(k) plan to an IRA.
He added, "We recognize that investment advice providers have been preparing for the exemption, and this step will allow them to implement important system changes. That said, we will continue our stakeholder outreach to determine how we might improve this exemption, the rule defining who is an investment advice fiduciary, and related exemptions to build on this approach."
The DOL will soon publish related guidance for retirement investors, employee benefits plans and investment advice providers, Khawar noted. He confirmed that temporary enforcement relief will remain in place until Dec. 20, 2021.
SHRM Online has selected the following articles to provide a deeper look into the new guidance and related regulatory actions that the Biden administration is expected to take.
A Surprising Move
That the Biden administration is allowing the Trump-era rule to go into effect, rather than halting it and potentially revising the rule, is likely a surprise to some in the industry. However, the final version of the rule also had more regulatory teeth than many expected, given that the DOL also withdrew a 2005 advisory opinion known as the Deseret Letter, a development indicating that the department viewed a recommendation to roll assets out of a 401(k) as the beginning of an advice relationship that would be require advisors to act in their clients' best interests.
The final version of the rule contains compromises for both the financial advice industry and consumer advocates, and it will serve as a foundation for what the Biden administration will craft. Almost certainly, the forthcoming guidance will be more consumer-friendly than the investment advice exemption finalized under former DOL Secretary Eugene Scalia, observers said.
Plan Sponsors' Oversight Responsibilities
The new guidance maintains a 1975 five-part test for identifying investment advice fiduciaries, which would be likely to include plan service providers who provide rollover recommendations. Advisors are required to abide by impartial conduct standards with three key components:
- Investment advice must be in the best interest of the investor and must not place any other interests ahead of that interest.
- Compensation paid for such advice must be reasonable.
- Statements made with respect to the transaction must not be materially misleading.
The guidance does not directly place new compliance requirements on employers that sponsor retirement plans. However, plan sponsors, as fiduciaries, have a duty to ensure that if their retirement plan service providers counsel participants, the advisors act in the participants' best interest under ERISA and related DOL regulations. Plan sponsors' fiduciary oversight includes understanding how and by whom investment advisors are being paid and whether those payments result in conflicts of interest.
Advised Beth Miller, an attorney for Spencer Fane, "employers should be aware of the exemption and its conditions in their engagement of (and interactions with) plan service providers."
(SHRM Online and Spencer Fane)
DOL Met with Stakeholder Groups
"Labor has been having remote meetings with representatives of financial-sector trade associations and consumer groups, asking whether the rule should be allowed to go into effect," said ERISA attorney Fred Reish, a partner at Faegre Drinker. "Many of those representatives recommended that the rule be allowed to go into effect."
The financial services groups, Reish said, "felt that they could live with the rule and were concerned that a delay could result in a harsher rule. The consumer groups felt that the rule was fairly robust, though not perfect. However, they believed that later this year the DOL would begin work on a more robust fiduciary definition and that would cover their concerns."
Reish added that later this year, the DOL will likely "start a regulation process to expand the [fiduciary] definition. It's not clear if the [Trump-era] exemption will be changed, but I think it's almost certain that a new regulation of the definition of fiduciary advice will be proposed" and "drafted carefully to avoid the [U.S. Court of Appeals] 5th Circuit decision that vacated the Obama-era regulation."
Investment Advisors Must Step Up
The DOL rule, in particular, expands the fiduciary duty for advisors handling retirement plan rollovers, a transaction historically treated as a one-time, nonfiduciary service.
The rule took effect Feb. 16, but Treasury and the IRS are deferring compliance with the new rules until Dec. 20 as long as the "impartial conduct standard" are met. That means the recommendation is made to a best interest standard, it has no materially misleading statements and reasonable compensation.
Firms offering investment advice will need to figure out ways of measuring the reasonable compensation, and the ways to mitigate compensation if a conflict exists.