Department of Labor’s New Investment Advice Fiduciary Rule and Related Exemption Amendments

By Michael Schloss and Stephen Wilkes

On April 25, 2024, the Department of Labor’s (DOL) new fiduciary investment advice rule, restyled as the “Retirement Security Rule”, was published in the Federal Register, amending a rule that has been unchanged since it was first published in 1975.[1]  Also on April 25^th, DOL published a package of amended prohibited transaction class exemptions (PTCEs) including amendments to:

PTCE 2020-02 which provides exemptive relief for eligible investment advice fiduciaries from the Employee Retirement Income Security Act’s (ERISA) prohibited transaction provisions,[2]

PTCE 84-24, which provides exemptive relief for certain transactions involving insurance agents and brokers, pension consultants, insurance companies and investment company principal underwriters (the primary source of prohibited transaction exemptive relief for the sale of insurance and annuity products to ERISA plans and IRAs);[3] and

PTCEs 77-4, 75-1, 80-83, 83-1 and 86-128 which provide exemptive relief for other types of transactions.[4]

Through this package, DOL seeks to modernize ERISA’s rules to reflect the significant changes that have occurred in the retirement investor space in the almost 50 years since ERISA was passed in 1974.[5]

DOL asserts that the previous definition of an investment advice fiduciary today fails to reflect the fact that, when DOL first published a regulation defining investment advice fiduciaries in 1975, employer-sponsored retirement savings were concentrated mostly in defined benefit plans and the vast majority of retirement savers were not managing their own retirement assets (nor consulting with investment advisers to do so).  In 1975, 401(k)s did not exist.  Today, however, the trillions of dollars of employer-sponsored retirement savings are held in defined contribution plans such as 401(k)s.  In addition, individual retirement plans (IRAs) also hold trillions of dollars in assets that were rolled over from defined contribution plans.  Today, the vast majority of tax-exempt retirement savings are managed by individual retirement savers and not professional investment managers.

DOL argues that individual retirement savers, who are now responsible for managing their own accounts (particularly 401(k)s and IRAs), lose billions of dollars in retirement savings because of the conflicted investment advice they receive,[6] and that the 1975 definition of an investment advice fiduciary is too restrictive to protect them.  By updating the definition of an ERISA investment advice fiduciary and amending related prohibited transaction class exemptions, DOL hopes to reduce this harm and further ERISA’s goal of protecting the tax-advantaged retirement savings of America’s workers and their families.

DOL’s Changes to the Definition of an Investment Advice Fiduciary:[7]

ERISA § 3(21)(A) states that a person who “renders investment advice for a fee or other compensation, direct or indirect, with respect to ERISA-covered assets, or has any authority or responsibility to do so,” is a fiduciary.  In 1975, the year after ERISA was enacted, DOL issued a regulation that defined an investment advice fiduciary by a five-part test.

Under that test, an investment-advice fiduciary is a person who (1) “renders advice…or makes recommendation[s] as to the advisability of investing in, purchasing, or selling securities or other property;” (2) “on a regular basis;” (3) “pursuant to a mutual agreement…between such person and the plan;” and the advice (4) “serve[s] as a primary basis for investment decisions with respect to plan assets;” and (5) is “individualized . . . based on the particular needs of the plan.”

Chamber of Commerce v. U.S. DOL, 885 F.3d 360, 364-365 (5^th Cir. 2018).  In Chamber, the Fifth Circuit determined that DOL’s previous attempt to change the 1975 regulation was unreasonable and vacated the rule.  Instead of appealing the Fifth Circuit’s opinion in Chamber, DOL went back to the drawing board and determined to craft a new rule that comported with the Fifth Circuit’s reasoning while still advancing the DOL’s goals.

DOL’s new rule explicitly seeks to address the Fifth Circuit’s concerns by defining an investment advice fiduciary based on the specific circumstances surrounding the relationship between the person/fiduciary and the retirement investor.  In particular, the new rule requires that, in order to qualify as an investment advice fiduciary, the person/fiduciary recommend a transaction or strategy involving securities or other “investment property”[8] of a plan or IRA to a “retirement investor”[9] and either:

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

1. 1. 1. Is based on a review of the retirement investor’s needs or individual circumstances,
      2. Reflects the application of professional judgment to those needs or circumstances, and
      3. May be relied on by the retirement investor as intended to advance the retirement investor’s best interest.

or

b.  The person/fiduciary represents or acknowledges that they are acting as a fiduciary with respect to the recommendation.

DOL notes that written disclaimers of fiduciary status will not control to the extent they are inconsistent with oral or written communications or other interactions with a retirement investor.

Special attention is warranted to the DOL’s broad definition of a “recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property” which includes recommendations as to:

1. The advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, investment strategy, or how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA;
2. The management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (g., account types such as brokerage versus advisory) or voting of proxies appurtenant to securities; and
3. Rolling over, transferring, or distributing assets from a plan or IRA, including recommendations as to whether to engage in the transaction, the amount, the form, and the destination of such a rollover, transfer, or distribution.

DOL also defines “fee or other compensation, direct or indirect” in broad terms.  According to DOL, this includes:

[A]ny explicit fee or compensation, from any source, for the investment advice or the person (or any affiliate) receives any other fee or other compensation, from any source, in connection with or as a result of the recommended purchase, sale, or holding of a security or other investment property or the provision of investment advice, including, though not limited to, commissions, loads, finder’s fees, revenue sharing payments, shareholder servicing fees, marketing or distribution fees, mark ups or mark downs, underwriting compensation, payments to brokerage firms in return for shelf space, recruitment compensation paid in connection with transfers of accounts to a registered representative’s new broker-dealer firm, expense reimbursements, gifts and gratuities, or other non-cash compensation.[10]

Finally, it should be noted that the definition of “relative” included in the regulation’s definition of “affiliate”, includes all of the relatives found at ERISA § 3(15) plus a fiduciary’s siblings and spouses of siblings (but not a sibling’s lineal descendants).[11]

The new definition of an investment advice fiduciary becomes effective September 23, 2024.

Amendments to Prohibited Transaction Class Exemptions:

PTCE 2020-02:

Along with redefining who is an investment advice fiduciary, DOL also amended PTCE 2020-02, which provides exemptive relief allowing investment advice fiduciaries to receive reasonable compensation for their services in connection with transactions involving the assets of a plan and the receipt of a mark up, mark down or other payment in connection with the purchase or sale of an asset in a riskless transaction or a “Covered Principal Transaction”.  These amendments follow on recent changes to 2020-02 adopted by DOL on December 18, 2020.

According to DOL, the most recent amendments were adopted in order to broaden PTCE 2020-02 to cover more transactions and to require “Financial Institutions” and the “Investment Professionals” who work for them to:

• acknowledge their fiduciary status in writing to Retirement Investors;[12]
• disclose their services and material conflicts of interest to Retirement Investors;
• adhere to Impartial Conduct Standards requiring them to:
  • investigate and evaluate investments, provide advice, and exercise sound judgment in the same way that knowledgeable and impartial professionals would in similar circumstances (the Care Obligation);
  • never place their own interests ahead of the Retirement Investor’s interest, or subordinate the Retirement Investor’s interests to their own (the Loyalty Obligation);
  • charge no more than reasonable compensation and, if applicable, comply with Federal securities laws regarding “best execution”; and
  • avoid making misleading statements about investment transactions and other relevant matters;

• adopt firm-level policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and mitigate conflicts of interest that could otherwise cause violations of those standards;
• document and disclose the specific reasons for any rollover recommendations; and
• conduct an annual retrospective compliance review.[13]

DOL asserts that it amended PTCE 2020-02 to provide a “catch-all” provision that would provide a common set of exemptive standards for all investment advice fiduciaries.  In the preamble to the amendments to 2020-02, DOL states:

To ensure that there is a common standard that Retirement Investors can rely on for all products and for all tax-advantaged retirement accounts, the Department is broadening this exemption to make it available for recommendations of all types of products by all fiduciary investment advice providers as defined in ERISA, the Code, and the final Regulation that the Department is issuing today.[14]

To advance this goal, the final amendments to PTCE 2020-02 expand the type of providers who can utilize 2020-02 to include pooled plan providers and robo-advisers.  It also now applies to all transactions as to which an investment advice fiduciary provides investment advice, including transactions that are executed on a principal or agent basis.  2020-02, however, does not generally apply to transactions where an investment professional or financial institution acts in a capacity other than as an investment advice fiduciary.

The final amendments to PTCE 2020-02 replace the “best interest standard” initially proposed by DOL with “Impartial Conduct Standards” that include, among other things, a “Care Obligation” (which tracks the language of ERISA’s duty of prudence found at ERISA § 404(a)(1)(B)) and a “Loyalty Obligation”.  In its final form, the term “best interest” has been removed from 2020-02 and, while ERISA’s duty of loyalty found at ERISA § 404(a)(1)(A) requires fiduciaries to act “solely in the interest of participants and beneficiaries”, 2020-02’s “Loyalty Obligation” simply requires, in general, that an investment advice fiduciary (a) base their recommendations on the Retirement Investor’s financial interests and (b) not put its own interests ahead of a Retirement Investor’s.  Of course, by its terms, 2020-02 does not relieve an investment advice fiduciary from any duty, responsibility or liability under ERISA § 404.

As discussed above, PTCE 2020-02 requires pre-transaction written disclosures that include an acknowledgment of fiduciary status, a statement of the Care and Loyalty Obligations and “all material facts” relating to the scope and terms of the relationship with the Retirement Investor, such as fees, costs, type of services provided to the Retirement Investor (including any material limitations) and Conflicts of Interest associated with the recommendation.  The exemption also requires specific “rollover disclosures”, including a discussion of available alternatives (such as leaving money in the Plan), fees and expenses, identifying who pays the Plan’s administrative expenses, and other information.

The exemption also requires Financial Institutions to establish, maintain and enforce written policies and procedures designed to ensure compliance with the Impartial Conduct Standards and other exemption conditions including, in particular, that the policies mitigate conflict of interests.  PTCE 2020-02 also requires each Financial Institution to conduct, at least annually, a retrospective review designed to detect and prevent violations of the exemption.  The retrospective review must result in a written report that is provided to, reviewed and certified by a Senior Executive Officer and results in other specified activities where appropriate (such as filing a Form 5330 reporting any non-exempt prohibited transactions discovered in the process).  Where a transaction occurs that fails to meet the exemption’s requirements, a “self-correction” process is provided.

Like the recent amendment to PTCE 84-14 for “qualified professional asset managers” (QPAMs), PTCE 2020-02 also broadens the disqualification provisions to include convictions of certain affiliated entities and foreign convictions.

PTCE 2020-02 as amended becomes effective September 23, 2024.  However, the exemption provides a one year “Phase-In Period” providing relief for transactions that comply with both the Impartial Conduct Standards and the fiduciary acknowledgement requirement of the exemption

PTCE 84-24:

 According to DOL, PTCE 84-24 has been amended to address the special challenges of overseeing investment recommendations by independent insurance agents who recommend annuities issued by more than one insurance company.[15]  It provides relief from ERISA § 406 for a variety of transactions involving parties in interest including, among other transactions, a plan’s purchase of an annuity as well as certain transactions involving recommendations of proprietary mutual funds.

The amendments to PTCE 84-24 considerably impact independent insurance agents who make recommendations among competing products, particularly annuities.  In addition, they (a) remove transactions involving proprietary mutual fund recommendations from the ambit of PTCE 84-24 (so that those transactions must now satisfy the provisions of amended PTCE 2020-02 to be exempt); (b) eliminate exemptive relief for recommendations of annuity and insurance products by insurance companies (and their employees) and (c) eliminate exemptive relief for recommendations of variable annuities and other insurance products that are considered to be securities.

Initially, DOL had proposed to limit the compensation that an independent producer could receive to an “Insurance Sales Commission” (a term defined in detail in the initial proposal).  In response, DOL received substantial pushback, including comments that its proposal was inconsistent with NAIC Model Regulations, that it would reduce investor choice, and that it would create an unlevel playing field where those who sold other products could be compensated in ways that independent insurance agents could not.  As a result, DOL expanded the scope of allowable compensation to be consistent with that permitted by PTCE 2020-02.

New conditions imposed by PTCE 84-24 include requiring written disclosures to be provided at or prior to any covered transaction.  These written disclosures include, among other things:

1. Acknowledgement that the Independent Producer is a fiduciary;
2. Statement setting forth the Impartial Conduct Standards (similar to those provided in PTCE 2020-02);[16]
3. All material facts about the scope and terms of the relationship with the retirement investor including (i) fees and costs that apply to the retirement investor’s transactions, holdings and accounts, (ii) notice of a right to additional information regarding cash compensation including the ability to get an estimate of the compensation that will be paid and the terms relating to its payment (e.g., whether it is one-time, or through multiple payments); and (iii) any limits on the recommendations that the Independent Producer could make;
4. All material facts relating to Conflicts of Interest; and
5. Documentation demonstrating the basis for the product recommended.

Like the new requirements in PTCE 2020-02, DOL added disclosure requirements to PTCE 84-24 relating to rollovers, including a requirement to identify alternatives available to the Retirement Investor (such as leaving money in the Plan), fees and expenses, identifying who pays the Plan’s administrative expenses, and other information.  84-24 also requires each Insurer to establish, maintain and enforce written policies and procedures for the review of each recommendation before an annuity is issued to a Retirement Investor.  In particular, those policies and procedures are to be designed to ensure compliance with the Impartial Conduct Standards, mitigate conflicts of interest and provide for compliance with other exemption conditions.

PTCE 84-24 also requires an Insurer’s policies and procedures to include a process for determining whether to authorize an Independent Producer to sell the Insurer’s annuity contracts to Retirement Investors, and for taking action to protect Retirement Investors when there has been a failure to comply with the Impartial Conduct Standards.  The Insurer must document the bases for its initial determination that it can rely on the Independent Producer to adhere to the Impartial Conduct Standards, and must review that determination at least annually as part of the retrospective review required by the exemption.  In addition, if any non-exempt transactions are identified by the retrospective review, the Insurer is required to direct the Independent Producer to, among other things, (a) correct the transaction, (b) file a Form 5330, and (c) pay any resulting excise taxes.  Like PTCE 2020-02, 84-24 requires that the retrospective review result in a written report that is provided to, and reviewed and certified by, a Senior Executive Officer of the Insurer.

Finally, as with PTCE 2020-02, PTCE 84-24: (a) also broadens the disqualification provisions to include convictions of certain affiliated entities and foreign convictions and (b) although effective beginning September 23, 2024, includes a one year “Phase-In Period” during which the exemption is satisfied if the Independent Producer complies with the Impartial Conduct Standards and fiduciary acknowledgement requirements.

PTCEs 75-1, 77-4, 80-83, 83-1, and 86-128:

DOL also finalized amendments to five other exemptions in order to remove relief from those exemptions for certain transactions with the intention that relief relating to compensation for those transactions will now be available under amended PTCE 2020-02 or PTCE 84-24.  This group of amendments, referred to collectively by DOL as the “Mass Amendment”, is not as far reaching as others in the DOL’s package.  One notable result is the shifting of relief from multiple class exemptions for investment advice to either PTCE 2020-02 or PTCE 84-24.[17]

Of note, PTCE 86-128 was not implemented as proposed, in that it does not eliminate the exclusion from the current exemption conditions of PTCE 86-128 for covered transactions engaged in on behalf of IRAs.

Final Thought:

Like its predecessors, the DOL’s latest changes to the definition of an investment advice fiduciary and the amendments to exemptions will face significant legal challenges.  Indeed, as of this writing, the first such challenge has been filed – by the Federation of Americans for Consumer Choice and five insurance industry plaintiffs who are asking a federal district court in Texas to block it.  Those challenging the new rules are eager to see them brought before the same appellate court that struck down the Department’s prior attempt six years ago.

As noted above, with this new package DOL believes it has addressed the concerns articulated by the Fifth Circuit in a way that advances the DOL’s concerns about the harm suffered by those who receive conflicted advice.  If the DOL’s rule stands, going forward, a new somewhat nuanced paradigm will prevail and, in many instances, financial salespeople and insurance agents will be held to a relationship of trust and confidence with their retirement investor customers as defined by the new DOL package.

Stay tuned here for more that will certainly follow. In the meantime, financial industry entities will have to once again do a self-assessment on where the DOL package of a new regulation and amended PTCEs will impact the delivery of products and services, and how to avoid fiduciary treatment and potential non-exempt prohibited transactions or develop protocols that will comply with this new regime.

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[1]  “Retirement Security Rule:  Definition of an Investment Advice Fiduciary”, 29 C.F.R. § 2510.3-21(c); 89 FR 32122 (April 25, 2024).

[2] “Amendment to Prohibited Transaction Exemption 2020–02”, 29 C.F.R. § 2510; 89 FR 32260 (April 25, 2024).

[3] “Amendment to Prohibited Transaction Exemption 84–24”, 29 C.F.R. § 2510; 89 FR 32302 (April 25, 2024).

[4]  “Amendment to Prohibited Transaction Exemptions 75–1, 77–4, 80–83, 83–1, and 86–128”, 29 C.F.R. § 2510; 89 FR 32346 (April 25, 2024).

[5]See DOL “Fact Sheet: Retirement Security Rule and Amendments to Class Prohibited Transaction Exemptions for Investment Advice Fiduciaries”, https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/retirement-security-rule-and-amendments-to-class-pte-for-investment-advice-fiduciaries

[6] See https://www.dol.gov/newsroom/releases/ebsa/ebsa20240423 (“Recent analysis by the Council of Economic Advisers of just one investment product — fixed index annuities — suggests that conflicted advice could cost savers up to $5 billion per year”).

[7] This article discusses only selected aspects of the new regulation and exemptions promulgated by DOL this past month.  The full package published by DOL, including preambles providing further insight into the DOL’s thought processes, is spread over 234 (single-spaced, small font) pages of the Federal Register.

[8] “Investment property” excludes “health insurance policies, disability insurance policies, term life insurance policies, or other property to the extent the policies or property do not contain an investment component.”

[9] “Retirement investor” is defined in the new regulation to include “a plan, plan participant or beneficiary, IRA, IRA owner or beneficiary, plan fiduciary within the meaning of ERISA section (3)(21)(A)(i) or (iii) and Code section 4975(e)(3)(A) or (C) with respect to the plan, or IRA fiduciary within the meaning of Code section 4975(e)(3)(A) or (C) with respect to the IRA.”

[10] 29 C.F.R. § 2510.3-21(e).

[11] 29 C.F.R. § 2510.3-21(f)(13).

[12] In the preamble to PTCE 2020-02, DOL provides model disclosure language acknowledging fiduciary status and stating the Care Obligation and Loyalty Obligation.  89 FR 32260, 32271-72.

[13] 89 FR 32260, 32261.

[14] 89 FR 32260, 32263.

[15] See DOL “Fact Sheet”, supra.

[16] DOL provides model language for this disclosure in the preamble to the amendments to PTCE 84-24.  See 89 FR 32302 at 32312.

[17] While originally proposed as amendments to PTCE 75-1, DOL instead modified PTCE 2020-02 section V(f) to define “Individual Retirement Account”” to include any account or annuity listed in Internal Revenue Code section 4975(e)(1)(B) – (F) and Section V(d)(5) (to include in the definition of “Financial Institution” non-bank trustees custodians of Health Savings Accounts).