On April 23, 2024, the U.S. Department of Labor (DOL) issued a final Retirement Security Rule defining who is an investment advice fiduciary in connection with providing advice to retirement investors, including retirement plans, plan participants and beneficiaries, and plan fiduciaries (those who have discretionary authority or control over the management of a plan or its assets).¹ The DOL also published related amendments to prohibited transaction exemptions (PTEs) available to investment advice fiduciaries, including PTEs 75-1, 77-4, 80-83, 83-1, 84-24, 86-128, and 2020-02. According to the DOL, the final rule and related PTE amendments “detail when advice providers are acting in a fiduciary role under federal pension laws and explain the conditions they must [meet] to protect retirement investors.” This final regulation and related amended PTE exemptions will take effect on September 23, 2024 (with a one-year transition period after the effective date for certain conditions in the PTEs).

The intention behind the final 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 (DB) plans in which employers bore the investment risk to participant-directed defined contribution (DC) plans and individual retirement accounts in which individuals bear the investment risk. Now, more than ever, plan sponsors and participants rely on investment advisers and consultants to help make important financial decisions. These advisers 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 adviser, and that the fees for that advice are reasonable.

Replacing the 1975 regulation, the final rule’s new fiduciary status test focuses on relationships of trust and confidence between the retirement investor and adviser, anticipated to “capture more [retirement] investment transactions in which the investor is reasonably relying on advice individualized to the investor’s financial needs and best interest,” including an anticipated increase in “the number of rollover recommendations being considered as fiduciary advice, [intended to] enhance protections to retirement investors, particularly recommendations regarding annuities.”

Definition of investment advice fiduciary

The final rule defines an investment advice fiduciary as a person who provides an investment recommendation to a retirement investor in one of the following contexts “for a fee or other compensation, direct or indirect”:

• “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:
• Is 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
• Alternatively, the person represents or acknowledges that they are acting as a fiduciary under either or both ERISA and the Internal Revenue Code (IRC) with respect to the recommendation.

Written statements by a person disclaiming either of the contexts above will not control to the extent they are inconsistent with the person’s oral or other written communications, marketing materials, applicable state or federal law, or other interactions with the retirement investor.

Under the final rule, when the advice is rendered to a retirement plan or plan fiduciary (and not to a plan’s participant or beneficiary), the “particular needs or individual circumstances” are those of the retirement plan, and the determination of whether the recommendation may be relied on by the “retirement investor,” as intended to advance the “retirement investor’s best interest,” focuses on the retirement plan.

Definition of a recommendation

According to the rule, an investment recommendation means recommendations as to:

• “The advisability of acquiring, holding, disposing of, or exchanging securities or other investment property, investment strategy, or how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA;
• “The management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., account types such as brokerage versus advisory), or voting of proxies appurtenant to securities;
• “Rolling over, transferring, or distributing assets from a retirement 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.”

A call to action

According to the rule, “whether a person has made a ‘recommendation’ is a threshold element in establishing the existence of fiduciary investment advice.” For purposes of the final rule, whether a recommendation has been made will turn on the facts and circumstances of the particular situation, including whether the communication reasonably could be viewed as a “call to action.” The more a communication is personalized for a specific customer or group of customers about a security or other investment or group of securities or other investments, the more likely that communication may be viewed as a recommendation. The determination of whether a recommendation has been made is an objective rather than a subjective inquiry and will be interpreted consistent with the framework of the U.S. Securities and Exchange Commission (SEC).

Human resources and other non-investment employees

The DOL indicates that the provision in the final rule that refers to “professional” investment recommendations is designed to clarify that the provision would not apply to human resources (HR) employees or other employees of the plan sponsor, who are not investment professionals, in their communications or interactions with plan participants, nor would the salaries of such employees of the plan sponsor be considered “a fee or other compensation in connection with or as a result of the educational services and materials that they provide to plan participants and beneficiaries. Further, the final rule does not alter the [longstanding ERISA] principles that persons who perform purely administrative functions for an employee benefit plan” are not plan fiduciaries.

Investment information and education

The final rule makes clear that merely providing sales pitches and investment information or education to retirement investors, without an investment recommendation, is not treated as fiduciary investment advice. Further, the DOL believes there is significant flexibility and clarity for a plan sponsor or service provider (such as a recordkeeper call center) to furnish helpful non-fiduciary investment education materials to participants relating to plan participation, plan distributions, and rollovers, and that the final rule is clear that, absent a recommendation or call to action, provision of investment information to retirement investors would not give rise to fiduciary status. However, a recommendation to take a plan distribution, even if it is not accompanied by a recommendation of a specific investment, is treated as an investment recommendation, such that, if all the other parts of the final rule are satisfied, then the person making the recommendation will be an ERISA fiduciary.

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

One-time advice is treated as fiduciary investment advice subject to ERISA, provided all of the requirements of the regulatory definitions above are satisfied.

The final rule provides that individuals who meet the defined criteria 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.

The DOL's Fact Sheet outlining the final rule states that the regulation closes the loophole for one-time advice, providing as an example that 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. It also cites rolling money into the provider’s annuities as another example.

Please contact your Milliman consultant to discuss how the final rule may impact your plan(s).

¹ The final rule also applies to IRA owners and beneficiaries and IRA fiduciaries. However, this Benefits Alert focuses on the impact on employer-sponsored retirement plans.