Retirement Security Rule: What It Is and What It Means for Investors

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What Is the Retirement Security Rule?

The Retirement Security Rule, also known as the fiduciary rule, aims to protect investors from conflicts of interest when receiving investment advice.

The rule was issued by the U.S. Department of Labor (DOL) on April 23, 2024. It takes effect on September 23, 2024, although a one-year transition period will delay the effective date of certain conditions to 2025.

Key Takeaways

• The Retirement Security Rule aims to protect retirement savers and ensure sound financial decisions for investors.
• The Rule is set to take effect in September 2024 with some additional regulations to take effect in 2025.
• Investment advice fiduciaries play a crucial role in complying with the rule.
• Proposed changes to the rule and public comments provide insights into its future direction.

The rule expands the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and associated amendments to two class prohibited transaction exemptions (PTEs). Because the rule specifies that anyone who provides investment advice for a fee to a retirement plan investor is considered a fiduciary, it will result in more financial professionals and transactions being subject to ERISA’s fiduciary requirements. 

According to the new rule, when an investment professional makes an individualized recommendation, holding themselves out as someone acting in the investor’s best interest, the advice must meet a fiduciary standard. The rule requires advisors—even those not registered investment advisors—to put the interests of their clients first. 

Investment Advice Fiduciaries Under the Retirement Security Rule

Under the Retirement Security Rule, an investment advice fiduciary is any individual or firm that provides investment advice to a retirement investor for a fee or other compensation. This includes advice for investors in workplace retirement plans, such as 401(k) plans and individual retirement accounts (IRAs). The advice may relate to money or other property of the plan or IRA.

To be considered an investment advice fiduciary, the advisor must provide this advice regularly as part of their business and as part of an agreement (either written or oral) that the advice is individualized to, or specifically directed to, the particular needs of the retirement plan or plan investor. This personalized advice may include recommendations on buying, holding, or selling securities.

Protections and Benefits for Retirement Savers

When investment advice providers act in a fiduciary role, they must:

• Act prudently and give advice that is in the investor’s best interest.
• Act loyally by putting the investor’s financial interests before their own.
• Avoid misleading statements that misrepresent conflicts of interest, fees, or investments.
• Notify investors about conflicts of interest.
• Charge fees that are both reasonable and customary. 

These requirements help investors make sound financial decisions to safeguard their retirement savings. For example, they stop practices such as recommending that investors roll over their retirement accounts into high-cost funds, which pay advisors large commissions but do little to improve returns for retirees.

The rules close loopholes that previously allowed some advisers to avoid fiduciary responsibilities. They also require financial institutions to have policies and procedures to manage conflicts of interest and ensure providers follow DOL guidelines. The requirement that financial advice in exchange for compensation must be accompanied by a written or oral agreement helps enhance retirement savers’ security and protect their interests.

Proposed and Final Changes to the Retirement Security Rule

When finalizing the new Retirement Security Rule, the Department of Labor made several important changes and clarifications to the original proposal.

Investment Recommendation

The final rule confirms that the determination of whether an investment recommendation has occurred will be made based on the Securities and Exchange Commission (SEC)‘s Best Interest regulation.

Facts and Circumstances

The facts and circumstances paragraph in the final rule now clarifies that the standard is an objective standard based on a reasonable investor in like circumstances.

Acknowledgement

Under the final rule, the DOL clarified that a person is a fiduciary if they acknowledge they are a fiduciary under Title I or II of ERISA with respect to the recommendation at issue, rather than with respect to all investment recommendations.

Education vs. Investment Advice

The final rule includes a paragraph clarifying and confirming how sales pitches can occur without requiring fiduciary status. The new paragraph also clarifies that if there is no investment recommendation, then providing investment information and education does not constitute fiduciary advice.

Public Comments

The DOL Retirement Security Rule has received various comments, including support and opposition. Support for the rule included comments from the Certified Financial Planner (CFP) Board, noting that the final rule aligns with investor expectations. The Economic Policy Institute notes that the rule will protect retirement investors who seek professional advice and ensure that investment professionals act in their clients’ best interests. Senator Bernie Sanders and Congressman Robert Scott have also expressed strong support for the rule.

Opposing the rule is Wayne Chopus, President and CEO of the Insured Retirement Institute. He has said, “This rule is the product of a severely flawed rulemaking process and defies applicable judicial precedent and the limitations on DOL’s rulemaking authority as established by Congress.”

Additional opponents, including the American Council of Life Insurers (ACLI) and the National Association of Insurance and Financial Advisors (NAIFA), which have both stressed that the new rule is unnecessary due to existing regulations, such as the SEC Regulation Best Interest (Reg BI) and the National Association of Insurance Commissioners (NAIC)’s best interest model regulation.

What is the 84-24 Rule?

The 84-24 rule is a provision in the Department of Labor’s fiduciary rule that allows insurance agents and brokers to receive commissions when selling annuities and other insurance products in certain circumstances. Specifically, the rule permits these financial professionals to receive compensation that would otherwise be prohibited under the fiduciary rule if they meet certain conditions, including providing disclosures, having a written contract with the client, and ensuring that the compensation is reasonable. This rule was amended as part of the April 23, 2024, Retirement Security Rule to address conflicts arising when independent insurance agents recommend annuities to retirement investors.

What is the 40 Act Fiduciary Duty?

The 40 Act fiduciary duty refers to the legal obligation of investment advisers to act in the best interests of their clients. This duty is derived from the Investment Advisers Act of 1940, which requires investment advisers to adhere to a fiduciary standard when providing investment advice to clients. This means that advisers must prioritize their clients’ interests above their own and provide recommendations that are suitable and beneficial to the client. The fiduciary duty also encompasses the duty of loyalty and care, requiring advisers to make full and fair disclosures, avoid conflicts of interest, and provide diligent and prudent advice.

What is the SEC Fiduciary Duty Rule?

The SEC fiduciary duty rule, also known as Regulation Best Interest (Reg BI), requires broker-dealers and financial advisors to act in the best interest of their retail customers when making investment recommendations. The rule aims to enhance the standard of conduct for financial professionals and mitigate conflicts of interest. It outlines disclosure, care, conflicts of interest, and compliance obligations, aiming to provide greater transparency and investor protection.

What Is the Most Important Duty of a Fiduciary?

The most important duty of a fiduciary is to act in the best interest of their clients. This obligation entails putting the client’s interests above their own and avoiding any conflicts of interest that could compromise their duty. Fiduciaries are expected to provide advice and make decisions solely aimed at benefiting their clients and ensuring that their financial recommendations align with their clients’ goals and risk tolerance. Maintaining this standard of care promotes trust and confidence in the fiduciary’s advice and actions.

What is a Breach of Fiduciary Duty?

A breach of fiduciary duty occurs when a fiduciary fails to act in the best interest of their clients, violates their duty of loyalty or care, or engages in any behavior that puts their own interests ahead of their clients. This can include conflicts of interest, non-disclosure of relevant information, or making decisions that benefit the fiduciary at the expense of their clients. Breaches of fiduciary duty are taken very seriously and can lead to legal action and financial consequences. It’s essential for fiduciaries to uphold their obligations and act with integrity to avoid such breaches.

The Bottom Line

The Retirement Security Rule, which goes into effect beginning on September 23, 2024, is designed to safeguard retirement savers and promote wise financial choices while expanding the definition of an investment advice fiduciary. As defined by the new rule, investment advice fiduciaries must adhere to a fiduciary standard of prudence and loyalty, avoid misleading statements, manage conflicts of interest, and charge reasonable fees for their advice.

Proponents of the rule believe it will protect retirement investors. Opponents consider the rule unnecessary and a duplication of regulations already in place.

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