DOL Would Oversee Annuity Sales, Rollovers Under New Proposal

The Department of Labor published a widely anticipated proposal Tuesday that will redefine when retirement advice triggers fiduciary status under the Employee Retirement Income Security Act of 1974.

The proposal would scrap the traditional five-part test for determining if an adviser is acting in a fiduciary capacity and replace it with a three-part test in which satisfying any one of the three conditions would make the adviser a fiduciary. The change, if implemented, would effectively create a stricter regulatory environment for financial professionals advising or selling investment products related to retirement savings.

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The first two criteria in the proposal say that if the adviser either invests money with discretionary authority or claims to be acting in a fiduciary capacity, the adviser is a fiduciary.

The third criterion is more complicated and more controversial: an adviser is a fiduciary if the adviser renders paid advice “to investors on a regular basis as part of their business and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest.”

This element essentially re-applies the “regular basis” requirement of the traditional five-part test to an adviser’s relationship with the public, or individual clients in aggregate, rather than applying it to the investors as individuals and their relationship with the adviser.

Regular Basis

This application of “regular basis” allows the DOL to capture one-time recommendations, such as to roll over retirement plan assets into an IRA, annuity sales or investment menu design for retirement plans. That would happen because, through the amendment, “regular basis” is reframed from the point of view of the adviser’s day-to-day business activities by pooling the recommendations together.

Fred Reish, a partner in law firm Faegre Drinker, explains that if an adviser is in the business of providing retirement investing advice generally, then no long-term relationship with a specific client would be needed before the adviser was considered a fiduciary for that client.

Carol McClarnon, a partner in law firm Eversheds Sutherland, adds that the “DOL is saying that regular basis is running your business.” Effectively, if you are a financial professional, you are satisfying the regular basis prong and are acting as a fiduciary.

David Levine, a partner in Groom Law Group, says the proposal would assert the DOL’s authority under ERISA over any retirement account and any annuity purchase made with plan assets, and recommendations in these spaces would be subject to ERISA fiduciary standards.

Plan Recommendations

Apart from recommendations made to plan participants, the proposal also addresses recommendations to plans. The proposal specifically addresses investment menu design advisement.

ERISA expert McClarnon says that while selecting investment options for a plan was already fiduciary advice, providing a wide range of options and letting the sponsor ultimately decide which to select generally is not considered in the fiduciary umbrella. This distinction does have a “line-drawing problem” that would likely be corrected by the proposal, she says.

Brad Campbell, a partner in Faegre Drinker and a former head of the Employee Benefits Security Association, notes that the proposal’s scope is “substantially similar to the 2016 rule that was vacated” by the 5th U.S. Circuit Court of Appeal and that it relies on a superficial change in reasoning that amounts to “atmospheric language.” He adds that the DOL does not have the authority to regulate IRAs in this manner and is “way out of its lane.”

All of the legal observers agreed that the proposal will be challenged in court. In Reish’s words, “Undoubtedly, there will be a lawsuit against it.”