Rollovers, Investment Menu, Annuity Advice Standards to Be Overhauled in DOL Proposal

The Department of Labor announced Tuesday that it will be proposing amendments to the five-part test for determining if an adviser is a retirement plan fiduciary. The proposal that has been much anticipated by the retirement investing and insurance sectors has been known as the “fiduciary rule” or more recently as the “retirement security” rule.

The DOL’s proposals in full:

Based on a fact sheet distributed by the DOL and comments from DOL officials, the proposal seeks to expand the DOL’s jurisdiction under the Employee Retirement Income Security Act to include annuity recommendations and rollovers to individual retirement accounts. The proposal, which the DOL announced will be issued by the White House later on Tuesday, will also cover advice given to plans on which investments to include in a retirement plan menu, according to the fact sheet.

Acting Secretary of Labor Julie Su confirmed on a press call that the proposal will “update the definition of investment fiduciary advice” to ensure that when advising retirement investors, advisers “must adhere to high standards of care and loyalty.”

“This will ensure that all retirement investors receive the same quality investment advice, regardless of the product or service they receive,” she said.

DOL officials framed the proposal in terms of reducing so-called “junk fees,” which the administration of President Joe Biden has targeted in several consumer-related sectors, and conflicts of interest. The fact sheet published by the DOL explained that advisers are often paid commissions to promote certain products covered by neither ERISA nor by Regulation Best Interest, which is enforced by the Securities and Exchange Commission.

Annuities were specifically discussed by both the fact sheet and DOL officials on the call as an example of a product that advisers are paid to sell which may not necessarily be in their client’s interest.

Lael Brainard, the director of the National Economic Council, said on the call that advisers “shouldn’t be paid more for recommending one investment product over another if it isn’t in the client’s best interest.”

“When a retirement saver pays for trusted advice that is actually not in their best interest and comes at a hidden cost to their lifetime savings, that’s a junk fee,” Brainard said. “In the months ahead, we’ll continue to use administrative action to do all we can to protect Americans from junk fees, building on our work with airlines, ticket fees, banks and now retirement advisers.” 

The proposal would also cover rollovers to individual retirement accounts, which are normally covered by Reg BI. A DOL official said the SEC regulates the assets being transferred, but the DOL’s point of interest is the retirement account itself and where the “proposal would kick in.”

The five-part test defining a fiduciary will be updated to incorporate rollover recommendations, according to the officials. When asked how this could be done in a fashion consistent with past litigation on the same subject, a DOL official answered that the previous rule swept in anyone giving advice for a fee, whereas this version would only include those in a “relationship of trust and confidence,” per the 2016 ruling by the 5th U.S. Circuit Court of Appeals.

The Insured Retirement Institute issued commentary ahead of the expected changes to the fiduciary rule that raised issues of legal standing. Its statement read: “The latest proposal, which is rebranded as a proposal to crack down on ‘junk fees,’ is unnecessary and redundant and is likely to fall outside DOL’s jurisdiction if challenged in the courts.”

The group also argued that the proposal is contradictory to goals of helping American save by “depriving them of access to retirement savings strategies and the right to work with their preferred financial adviser on terms that best fit their situations and needs.” It also called up recent bipartisan legislation to advance retirement savings, noting the new rule would affect participants’ “ability to use the measures included in the SECURE Act and the SECURE 2.0 Act.”