- Definition of fiduciary is updated. Under the Retirement Security Rule, issued April 23, certain individuals can be held to a higher standard — that of a fiduciary — when they give financial information to employees and/or plan officials.
- Clarity provided on HR actions. The rule explains that if HR simply provides retirement investment plan information or education to employees, this does not constitute a fiduciary relationship.
- Advice may trigger fiduciary status. In certain circumstances, one-time advice can qualify someone as a fiduciary.
The definition of an investment advice fiduciary has been updated by a new Department of Labor (DOL) final rule, released April 23 and published in the Federal Register April 25. The updated definition clarifies that HR professionals who conduct typical retirement plan work are not acting as fiduciaries. The rule expands the definition of a fiduciary to include those who, in certain cases, provide financial advice on a one-time basis. It also sets forth the standards of service that fiduciaries must provide.
The updated definition laid out in the Retirement Security Rule, which takes effect September 23, applies when financial services providers give compensated investment advice to retirement plan participants, individual retirement account owners and plan officials responsible for administering plans and managing their assets. It holds certain individuals to a higher standard — that of a fiduciary — when they give financial information to employees and/or plan officials.
(Workspan Daily first covered this rulemaking when it was at the proposal stage in November 2023.)
HR Professionals Typically Are Not Fiduciaries
Under the final rule, when the HR department and individual HR professionals simply provide retirement investment plan information to employees, they are not acting as fiduciaries.
In a call with reporters after release of the final rule, Ali Khawar, the principal deputy secretary for the Employee Benefits Security Administration (EBSA), stated the rule offers a clarification more than a change since, as she put it, the DOL never intended for educational materials to fall within the rule’s purview.
In fact, the final rule states it 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.” In addition, it states, “the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of the rule.”
Further, the final rule does not alter Interpretive Bulletin 75-8, D-2 (29 CFR 2509.75-8) (IB 75-8) under the Employee Retirement Income Security Act of 1974 (ERISA), which states that individuals “who perform purely administrative functions for an employee benefit plan” and “who have no power to make decisions as to plan policy, interpretations, practices or procedures, are not fiduciaries.”
With that said, there are additional permutations brought about by the final rule to consider.
One-Time Advice Can Qualify Someone as a Fiduciary
Under the new final rule, financial advice offered only one time may qualify the adviser as a fiduciary. That is a significant change from the prior rule (issued in 1975) that defined a fiduciary as someone:
- Who provided advice on a “regular basis” as part of a “mutual agreement” and,
- Whose advice served as a “primary basis” for investment decisions.
In a Fact Sheet on the new rule, the agency pointed out that one-time advice — such as a recommendation to roll funds from a workplace retirement account into an Individual Retirement Account (IRA) — is “often the most important advice the retirement investor will ever receive.”
Such one-time advice now qualifies as part of a fiduciary relationship, provided all the other criteria of a fiduciary are met (see below).
Who Is a Fiduciary Under the New Rule?
The department’s final rule states financial services providers are investment advice fiduciaries under federal pension law if all the following criteria hold true:
- They make an investment recommendation to a retirement investor.
- The recommendation is provided for a fee or other compensation, including commissions.
- The financial services provider holds itself out as a trusted adviser by either: (1) specifically stating it is acting as a fiduciary under Title I or II of ERISA, or (2) making its recommendation in a way that would indicate to a reasonable investor it is acting as a trusted adviser making individualized recommendations based on the investor’s best interest.
Again, in providing clarity for HR professionals, the final rule explicitly states: “The Department also would not consider salaries of human resources employees of the plan sponsor to be 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.”
Standards Established Under the New Rule
Under the final rule, fiduciaries must:
- Meet a professional standard of care when making recommendations (i.e., give prudent advice).
- Never put their own financial interests ahead of the retirement investor’s when making recommendations (i.e., give loyal advice).
- Avoid misleading statements about conflicts of interest, fees and investments.
- Charge no more than what is reasonable for their services.
- Provide the retirement investor basic information about the adviser’s conflicts of interest.
Fiduciaries and Conflicts of Interest
Conflicts of interest can reduce investors’ returns and increase their costs. According to the DOL, a recent analysis by the Council of Economic Advisers of just one investment product — fixed index annuities — suggests conflicted advice could cost retirement investors up to $5 billion per year.
Under the final rule and amended exemptions, financial institutions overseeing investment advice providers must have policies and procedures to manage conflicts of interest and ensure providers follow these guidelines.
Why Did This Final Rule Occur?
According to a DOL press release, the final rule seeks to “protect the millions of workers who are saving for retirement diligently and rely on advice from trusted professionals on how to invest their savings.”
The agency noted that the previous definition of a fiduciary was written nearly 50 years ago, when individual retirement accounts were less common and before 401(k) plans existed. “Today,” the release stated, “individual plan participants and IRA owners — not professional money managers — are expected to make important, complex financial decisions, and they seek help from expert advisers, which made updating this rule necessary.”
Lisa M. Gomez, Assistant Secretary for Employee Benefits Security, added: “The investment landscape has changed, the retirement landscape has changed, and it is critical that our regulations are responsive to those changes.”
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