On October 31, 2023, the U.S. Department of Labor (DOL) issued a proposed Retirement Security Rule defining who is an investment advice fiduciary. The DOL also published proposed amendments to prohibited transaction exemptions PTE 75-1, 77-4, 80-83, 83-1, 86-128, PTE 84-24, and PTE 2020-02.

The intention behind the proposed rule is to modernize the definition of “investment advice fiduciary” to recognize how the retirement landscape has changed since the DOL’s original 1975 regulation was issued. Since then, retirement plan investments have become increasingly complex and the landscape has evolved from professionally managed defined benefit plans in which employers bore the investment risk to participant-directed defined contribution plans and individual retirement accounts in which individuals bear the investment risk. Now, more than ever, plan sponsors and participants rely on investment advisors and consultants to help make important financial decisions. These advisors are paid for their services, and the DOL wants to ensure that the advice they provide is in the best interests of the investor, rather than the advisor, and that the fees for that advice are reasonable.

Definition of investment advice fiduciary

The proposed rule defines an investment advice fiduciary as a person who provides investment advice or makes an investment recommendation to a retirement investor (i.e., a plan, plan fiduciary, plan participant or beneficiary), and the advice or recommendation is provided in one of the following contexts “for a fee or other compensation, direct or indirect”:

• The person has discretionary authority or control with respect to purchasing or selling securities or other investment property for the retirement investor.
• The person makes investment recommendations 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 as a basis for investment decisions that are in the retirement investor’s best interest.
• The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.

The DOL views a recommendation as a communication (written, oral, or electronic) that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the retirement investor engage in or refrain from taking a particular course of action. The more individually tailored the communication is to the retirement investor, the more likely the communication will be viewed as a recommendation. Individual actions may not be viewed as a recommendation but may amount to a recommendation when considered in the aggregate.

Fiduciary status determined on a transactional basis

The proposed rule would have an individual evaluate whether they are an investment advice fiduciary on a transaction-by-transaction basis. “Regular basis” in the definition above does not refer to the number of times a retirement investor interacts with an individual providing investment advice. Rather, it refers to whether the advisor regularly provides investment advice as a part of their business. Therefore, a person providing investment advice to a retirement investor in a single interaction could be considered an investment advice fiduciary based on that one interaction.

The proposal notes that human resources employees would not be considered investment advice fiduciaries because they do not regularly make investment recommendations to investors as part of their business. In addition, the proposal indicates that individuals who perform purely administrative functions for an employee benefit plan, within a framework of policies, interpretations, rules, practices, and procedures made by other persons, but who have no power to make decisions as to plan policy, interpretations, practices, or procedures, would not be fiduciaries by virtue of those purely ministerial functions.

Advice on rollovers and other one-time transactions are considered covered recommendations

The proposed rule provides that individuals would be considered as giving investment advice if they make recommendations on the rolling over, transferring, or distributing of assets from a plan, including recommendations as to whether to engage in the transaction, the amount, the form, and the destination of such a rollover, transfer, or distribution. Such an individual would be an investment advice fiduciary if they also meet the criteria in the definition above. Some examples provided in the DOL’s Fact Sheet outlining the proposed rule include a recommendation to liquidate a workplace retirement savings plan account and purchase an annuity, or advice to a terminating defined benefit pension plan on the purchase of a group annuity contract to cover all the plan participants’ lifetime benefits.

Comments on the proposed rule are due on or before January 2, 2024.

Please contact your Milliman consultant to discuss how these proposed rules may impact your plan(s).