What’s In the Final Retirement Security Rule?

The Department of Labor’s final retirement security rule released Tuesday covers many of the same elements as the initial proposal, but contains key changes, such as exemptions for educational materials and the removal of discretionary authority as an automatic trigger of fiduciary status.

The final release in many places makes it clear that a previous iteration of this rule was vacated by the U.S. 5th Circuit Court of Appeals in 2018 and strongly emphasizes the differences between this rule and that one. The release notes that it applies to relationships of “trust and confidence” only, a key phrase in the court’s ruling. The final rule also does not require contract modifications nor require insurance companies to accept fiduciary responsibility over independent agents who sell their products, two other objections that had been raised by the court.

Since the final rule was published, reaction has varied based on the industry of the responder. Those in insurance and asset management were strongly opposed, such as the Insured Retirement Institute and the Investment Company Institute. Those in consumer advocacy, investment advice, financial planning and plan sponsorship have been more supportive, such as the AARP, the Investment Adviser Association, the CFP Board, and the American Retirement Association.

The rule has an effective date of September 23, with various provisions coming into effect over the course of a year from that date.

Below is a look at the details ahead of the official rule being posted Thursday in the Federal Register.

What’s Staying the Same From the Proposal

The core principles of the proposal are intact in the final rule. As Lisa Gomez, assistant secretary of Labor for the Employee Benefits Security Administration explained during a press call Tuesday, if a financial professional “holds themselves out as providing individualized advice that is in the investor’s best interest, they will be held to a fiduciary standard.”

The final rule also still captures one-time transactions such as annuity sales, IRA rollovers and investment menu sales into fiduciary status under the Employee Retirement Income Security Act. The rule reads: “The regulation closes the loophole for one-time advice. A financial services provider will be a fiduciary with respect to a recommendation to roll over assets from a workplace retirement plan to an IRA if every element of the fiduciary definition is satisfied.”

DOL rejected arguments from some commenters that existing regulation under the Securities and Exchange Commission’s Regulation Best Interest and the NAIC’s Model Regulation were adequate. The final release notes that Reg BI does not cover non-securities or the plans themselves since they are not retail investors.

It also contains a lengthy discussion of why the NAIC Regulation is not sufficient in the context of annuity sales.

The final release was especially critical of the NAIC’s Model Regulation’s treatment of conflicts, which excludes compensation as a source of conflict. The DOL added that the Model Regulation does “not expressly incorporate the best interest obligation not to put the producer’s or insurer’s interests before the customer’s interests.”

What’s Changing

Discretionary Prong

The proposed rule initially featured a three-part test for determining who is a fiduciary under ERISA: any financial professional who regularly advises clients for a fee that has discretionary authority, or who claims to be a fiduciary, or provides recommendations that indicate is it based on the investor’s needs and may be relied upon for decisions in their best interest.

The final rule drops the discretionary authority prong of the test. Tim Hauser, deputy assistant secretary for program operations of EBSA, explained during the press call that the discretionary authority prong had considerable overlap with the other two prongs “and we didn’t need a more categorical rule.” He added that many commenters provided hypotheticals of discretionary authority that don’t entail a relationship of trust and confidence and were inappropriate to be included as fiduciary communications.

Ali Khawar, the principal deputy secretary for EBSA, added that those with discretionary authority are often fiduciary managers under ERISA in any case.

When the discretionary prong is removed, it is instead a two-part or-standard test. Prong one is: If the professional says they are a fiduciary under ERISA, then they are one. The proposal said that if you claim to be a fiduciary in any capacity, then you are one. The final rule, however, acknowledged that a professional may be a fiduciary under another requirement and be required to say so, such as Reg BI or state law, so the narrower definition was made.

The second prong is intended to capture relationships of trust and confidence between an adviser and a client, and focuses on when general investment material turns into personalized retirement advice. It reads: “The person either directly or indirectly (e.g., through or together with any affiliate) makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation: based on review of the retirement investor’s particular needs or individual circumstances, reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.”

Educational Materials

The rule also clarifies that educational and related communications are not captured. Hauser explained that the rule “does not capture an HR person that is just providing education.” Khawar framed this as more of a clarification than a change, since the DOL never intended to include educational materials.

The final rule develops this point in more detail, saying: “The mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of the rule.”

One change that the DOL made regarding HR employees was to add the word “professional” to “investment recommendations.” The final release explained that “this change is designed to provide additional certainty that the provision would not be satisfied by the ordinary communications of a human resources employee, who is not an investment professional, in communications with plan participants.”

The rule emphasizes that the communication must be a “call to action” to be understood as a recommendation. However, the rule notes that informing a participant that they must take a required minimum distribution or face a penalty is not a call to action or recommendation, but rather educational in character. Similarly, explaining the benefits or drawbacks of retirement account-related features, such as hardship withdrawals or loans would typically be considered educational and not a call to action.

David Certner, the legislative policy director at AARP, notes that the final rule is “more consistent with the SEC’s own Regulation Best Interest” in terms of how it understands recommendations. He says that this will provide “more consistency among advisers.”

Titles

The proposal asked commenters for recommendations on how to handle titles such as “trusted adviser” when such professionals interact with retirement savers and if that communicates a relationship of trust and confidence.

In the final release, the DOL said, “The Department intends that the use of titles, credentials, and marketing slogans will be a relevant consideration but will not generally be determinative.” Specifically, it would be a consideration under the second prong, but not enough on its own to trigger fiduciary status.