Fiduciary Rule Rises Again
Good to Know
If the term “Department of Labor Fiduciary Rule” sounds familiar, there’s a reason. The DOL’s previous Fiduciary Rule (2016) was a failed regulatory effort that was struck down by the Fifth Circuit Court of Appeals in 2018. The Court held that the DOL exceeded its authority. One perspective of the Court’s ruling is that only Congress can make new law, not an agency of the executive branch of the Federal government acting by unilateral fiat.
Welcome to 2024 and the resuscitation of a pared down version of DOL’s Fiduciary Rule—the Retirement Security Rule (RSC). According to Morningstar, “The rule redefines who qualifies as a fiduciary under the Employee Retirement Income Security Act. Put another way, the rule clarifies when financial professionals must act in the best interest of their client.” The RSC becomes effective September 23, 2024, unless delayed, modified, or struck down through a challenge in court.
Three key takeaways are:
- Redefinition of “investment advice,”
- What is not “investment advice,” and
- Clarification of IRA rollover “investment advice.”
Redefinition of Investment Advice Under the RSC
Investment advice includes certain recommendations to a participant, beneficiary, or fiduciary of an employer-sponsored qualified retirement plan—such as a 401(k)—or IRA. As in prior rulings, a recommendation is meant to be broadly inclusive of any strategy involving securities. For example, a strategy can include a recommendation to buy, sell, or hold a security. Note that an advisor or firm providing strategies to the plan itself can be considered investment advice.
What Is Not Investment Advice Under the RSC
The DOL noted that investment advice excludes:
- A “sales pitch,”
- The provision of investment information or
- Generalized financial education.
However, if a recommendation is present, the exclusion does not apply. The difference between a sales pitch and a recommendation appears to mean that a sales pitch lacks the personalized recognition of a client’s specific needs, goals, and risk tolerances. Additional clarification from DOL is expected.
IRA Rollover Investment Advice Under the RSC
In what some would call a dramatic expansion of fiduciary duty, “the regular advice” requirement for fiduciary status may no longer apply. Specifically, even a one-time recommendation to roll over assets into an IRA from an employer-sponsored qualified retirement plan is considered investment advice. Consequently, a fiduciary duty would be imposed on financial advisors and their firms.
Summary
This early summary of the RSC is meant to make our readers aware of the broad issues that are included in this new rule. A future article will be posted as the open questions and potential ambiguities are clarified by DOL.
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