The US Department of Labor (DOL) has issued a new retirement security rule proposal that aims to amend the five-part test in its 1975 regulation for determining whether a person is a fiduciary by providing investment advice for a fee. The proposed rule, titled 'Retirement Security Rule: Definition of an Investment Advice Fiduciary,' would expand the circumstances under which a person could be treated as providing investment advice subject to ERISA's fiduciary standards. It would replace the Five-Part Test's requirements with a broader test based on the retirement investor's reasonable expectations and context.
The proposed rule also includes treating advice on rolling over an account from an employer-sponsored plan to an IRA as fiduciary investment advice. This expansion of the definition of 'investment advice' for a fee under ERISA and the Internal Revenue Code aims to make more workers eligible for overtime pay unless employers pay a higher salary threshold. The rule aims to expand the number of workers who qualify as investment advice fiduciaries.
The proposal covers recommendations to roll over an account from an employer-sponsored plan. The DOL believes that the proposed rule would establish a fiduciary obligation between investment advisers and retirement investors. The proposed amendments to prohibited transaction exemptions would narrow their scope, requiring investment advice fiduciaries to rely on PTE 2020-02. The DOL has provided a 60-day comment period, and a virtual public hearing has been scheduled for December 12-14, 2023. Litigation is expected, as interested parties may challenge the DOL's authority.
The proposal has implications for fiduciary status, investment education, marketing activities, and compensation arrangements. ERISA plan and IRA fiduciaries and service providers should carefully review the proposal to determine its potential impact.
According to a comprehensive guide by Proskauer Rose LLP, the proposed rule would replace the current five-part test with a broader test based on the retirement investor's reasonable expectations and context. The rule would pick up any recommendation by a party with discretionary investment authority or control over a retirement investor's assets, even if the discretion relates to other assets that are not plan assets. The rule would also consider certain common marketing activities as fiduciary investment advice. The DOL has proposed amendments to prohibited transaction class exemptions to require all investment advice fiduciaries to comply with impartial conduct standards. Investment advisers and managers should carefully review the proposal to determine its potential impact.
Source: Lexology [7c45e0c9], JD Supra [ac8293d6]
