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Another Fiduciary Rule? How This One Impacts Participants and Trustees

Over the last three months, we’ve experienced two additional noteworthy developments in the Department of Labor’s long-running, stop-and-start efforts to modernize the protections available to retirement plan participants. Those developments don’t finish the story; the DOL has promised more in “the coming days”. But they do merit a brief assessment of how this recent activity has affected the protections afforded to participants. We’ll be sure to expand on these impacts during the Fiduciary 15 webinar.

Rulemaking HistoryIn an effort to keep this relatively brief, I’m going to leave out all of the DOL’s efforts prior to 2020. As President Trump’s term was winding down, on December 18, 2020, the DOL finalized a prohibited transaction class exemption that addressed the ability of “investment advice fiduciaries” to receive compensation as a result of advice to roll over assets from a plan (or an IRA) to an IRA. With the rule slated to become effective February 16, 2021, many expected the Biden administration to abandon the new rule before it became effective. (I may or may not have told Scott Colangelo that I viewed the December action as a “nothing burger” because I was quite certain it would be vacated.) But the Biden administration surprised us in February with the announcement that it would permit the Trump DOL rule to become effective as scheduled.

The Core Issues. We’re more than a decade into the DOL wrestling with a couple of core issues that arise when investment advisers and broker-dealers are communicating with plan participants and IRA owners. First, how do we determine whether the adviser or broker is acting as a fiduciary? Second, if one is acting as a fiduciary, what requirements must be met in order for the fiduciary to receive compensation in connection with the advice it provides? If one is not a fiduciary, ERISA would not require that he or she act in the participant or IRA owner’s best interests. This frees up the adviser or broker to provide recommendations regarding the decision to take a distribution or make a rollover, how to invest the proceeds of a rollover, and how to invest within an IRA — all without fiduciary status.

Here’s the biggest issue with that first core issue identified above: it’s too easy for an adviser or broker to avoid fiduciary status in the rollover and distribution contexts. The applicable rule is a five-part test from a 1975 regulation, which does not take into account how the financial world operates today. An adviser or broker need only avoid one element – such as the requirement that the advice be given on a “regular basis” – and it may proceed under the assumption it is not acting as a fiduciary. For example, many advisers and brokers avoid fiduciary status with respect to a rollover recommendation because that recommendation is not provided on a “regular basis”.

The New Rule. The Trump-era DOL rule (like the prior rules) is quite complex. For purposes of our discussion here, two aspects stand out. First, it retained the five-part “are-you-a-fiduciary” test from the 1975 regulation. On its surface, this contributed to the belief that the “new rule” had no more teeth than the rule that’s been on the books for decades.

Second, however, the DOL used the Preamble to explain that it would take a more expansive view of the “regular basis” requirement in the context of rollover-related advice. It went so far as to address the situation in which the investment advice provider has not previously provided advice, but will be regularly giving advice regarding the IRA in the course of a more lengthy financial relationship. It concluded that a rollover recommendation would be the start of an advice relationship that satisfies the “regular basis” prong.

Compromising SpiritAlthough the Biden administration likely began with the expectation it would simply abandon the Trump rule, it may have been surprised by what it found as it engaged in conversations with groups supporting the advisers and brokers (which would favor a less restrictive rule) and those supporting consumers (which would favor more protections for investors). The former seemed to think that the current rule wasn’t so bad and perhaps was better than what the Biden DOL would implement if starting from scratch. The latter seemed to think it was important to keep the more expansive rollover position on the books, with the idea that the Biden DOL would build from that new foundation.

What Does This Mean for Plan Fiduciaries and Participants? In short, it means that plan participants will receive greater protections. It will be much more likely for rollover advice to be delivered in a fiduciary capacity. This will, in turn, require the advice provider to satisfy the exemption’s requirements in order to receive any compensation in connection with the advice.

Yet we don’t yet know how expansive those greater protections may become. As the DOL continues with a temporary enforcement policy until December 20, 2021, it is actively exploring the right approach to provide additional guidance. We anticipate it will attempt to thread the needle with a rule that is sufficiently expansive to address its concerns about conflicted advice, yet narrowly crafted to avoid another crippling loss in Federal court, as the Obama DOL rule experienced in 2018.

Matthew Eickman
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