Acting Secretary of Labor Su Clarifies Aim of New Fiduciary Proposal

The Department of Labor continues to focus on its still-unpublished fiduciary rule draft clarifying when advisers providing investment advice for a fee for benefit plans and individual retirement accounts are ERISA fiduciaries, according to information the department provided to a U.S. House of Representatives committee.

The House Committee on Education and the Workforce published written answers on October 11 from DOL Acting Secretary Julie Su to questions from a June hearing hosted by the committee. The written answers included a defense of the unpublished fiduciary rule draft proposal currently being considered by the Office of Management and Budget.

Su wrote that the purpose of the proposal is to amend “the regulatory definition of the term fiduciary set forth at 29 CFR 2510.3-21(c) to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of section 3(21) of ERISA.”

The DOL had previously stated that the proposal will change its regulation of “the ways advisers are compensated that can subject advisers to harmful conflicts of interest.” The written answers reword this same concern: “Our concern consistently has been and continues to be with financial arrangements that can present conflicts of interest” for advisers in the retirement space.

This purpose—to broaden the scope of 3(21) fiduciary status for plan advisers to potentially include IRA rollovers and related transactions—is attracting some controversy, despite the fact that no full draft of the proposal is available.

Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute, says there is an extensive history of litigation establishing that advice concerning IRA rollovers is “beyond [the DOL’s] jurisdiction.” He was referring to a 2016 5th Circuit Court of Appeals decision that ruled IRA rollovers are one-time advice, not a “special relationship of trust and confidence,” and therefore do not trigger fiduciary status under ERISA.

Despite this, the DOL is “not ready to give up that fight,” and “they are not ready to just say, ‘We can’t regulate rollovers,’” says Berkowitz.

For Berkowitz, there is “not a need for further rulemaking with all the changes that have been made,” because of Regulation Best Interest, finalized by the Securities and Exchange Commission after the 2016 decision, which requires advisers to give advice in the best interest of their clients and to disclose conflicts.

IRA rollovers can be complicated transactions, which can expose participants to changes in fee structures. The implications of more sophisticated rollovers, such as from a traditional 401(k) to a Roth IRA, may not be apparent to an unsophisticated investor with no adviser. However, Reg BI applies to rollovers because they involve the divesting of plan assets and re-investing them into an IRA, Berkowitz explains, which is already regulated by the SEC.

The OMB typically takes between 60 and 90 days to review a proposal, but it can also extend the process. The proposal was first sent to the OMB on September 8, so industry actors hope a published proposal will be released for comment between November 7 and December 7.

Berkowitz adds that the OMB has begun holding meetings with stakeholders to discuss the proposal, though a draft is not being made available to stakeholders. He says he intends to tell the OMB that the proposal as he understands it is “not a proposal that should be allowed to come out for public comment.”