The U.S. Department of Labor (DOL) released its final “investment advice rule” on April 23, 2024 — set to become effective in September — after several failed attempts, years of deliberations and multiple lawsuits. If not delayed or overturned by new litigation, the DOL may have finally succeeded in replacing its long-standing “five‑part test,” first adopted in 1975 regulations, for determining when a person is providing “fiduciary” investment advice to an investor in a retirement plan or IRA.

No sooner had the DOL published the final fiduciary rule than it was hit with a lawsuit in Texas federal court on May 2, 2024, by a group of Texas-based insurance agents looking to invalidate the new regulations. The plaintiffs allege that the DOL exceeded its authority under ERISA, the Internal Revenue Code (Code) and the Administrative Procedures Act. Here we go again!

This eAlert reviews the new definition of an “investment advice fiduciary” in the DOL’s new ERISA regulation. But there is much more! We will discuss the revised prohibited transaction exemptions (PTEs) the DOL issued in conjunction with the final regulation in two later eAlerts, one explaining amended PTE 2020‑02 and another explaining other amended PTEs (PTEs 84-24, 75-1, 77‑4, 80-83 and 86-128).

Final ERISA Regulation
The final rule defines when a person is an “investment advice fiduciary” in connection with providing advice to an investor saving for retirement through a tax-qualified retirement plan (401(k) plan and defined benefit pension plan) or IRA. The DOL will apply the newly expanded test based on the activities of the “person,” which includes the firm and its employees, agents and representatives. Retirement investors include participants and beneficiaries in retirement plans, IRA owners and beneficiaries, and retirement plan and IRA fiduciaries.

Under the final rule, a person is an “investment advice fiduciary” if they provide a covered recommendation in either of the following contexts AND the person receives a fee or other compensation, direct or indirect, for or with respect to that recommendation:

1. The person either directly or indirectly (i.e., through or together with an 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; and
• Reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances; and
• May be relied on by the retirement investor as intended to advance the retirement investor’s best interest; OR

2. The person represents or acknowledges (in writing or orally) that they are acting as a fiduciary under ERISA, the Code or both with respect to the recommendation — this is a carry-over condition from the previous definition.

Fiduciary status is imposed only if ALL parts of the final rule are satisfied.

Intent to Create Uniformity in Investment Advice Standards
The final regulation, along with the amended PTEs, is intended to provide uniformity across retirement investment markets and investment products. This rulemaking expands a common fiduciary standard to individuals, firms and markets not currently held to a fiduciary or best interest standard. This change will primarily impact service providers to plans — those recommending rollovers and independent insurance producers recommending fixed and indexed annuities products that are not regulated as securities products.

The DOL believes the existence of safeguards based on fiduciary and best interest obligations in only certain investment markets, such as those regulated by the U.S. Securities and Exchange Commission’s (SEC) Regulation Best Interest or the Investment Advisers Act of 1940, as amended, creates investor confusion and incentives for insurance agents to recommend investment products in less regulated markets. The DOL identified the following shortcomings in the current regulatory landscape:

• Regulation Best Interest only applies to recommendations made by broker-dealers to retail customers.
• Securities laws (e.g., the Advisers Act and Regulation Best Interest) may not apply to advice on investments such as real estate, fixed indexed annuities, commodities, certain certificates of deposit and other bank products.
• Variable annuities and some indexed annuities are considered securities and are subject to securities regulation, while fixed annuities, including fixed indexed annuities are subject to state insurance regulation.
• The National Association of Insurance Commissioners (NAIC) Model Regulation, which sets standards and procedures for recommending annuity products, has not been adopted in all states. Furthermore, the NAIC has expressly disclaimed that its model standard creates fiduciary obligations and disregards all forms of compensation as a source of material conflicts of interest.

Definition of Covered Recommendation
For purposes of the final rule, whether a covered 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 DOL intends that whether a recommendation has been made will be construed in a manner consistent with the SEC’s framework in Regulation Best Interest.

A covered recommendation includes statements made about or actions taken involving:

• The advisability of acquiring, holding, disposing or exchanging securities or other investment property, advice regarding 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 or voting of proxies.
• Rolling over, transferring or distributing assets from a plan or IRA, including recommendations as to whether to engage in the transaction, the amount, the form and the destination of such rollover, transfer or distribution.

Trusted Advice Provider
The final rule will result in the application of fiduciary status under circumstances in which both parties — the investment professional and advice recipient — should reasonably understand that the retirement investor would rely on the recommendation for investment decisions.

Professional Titles Relevant But Not Determinative
The DOL intends that the use of titles, credentials and marketing slogans will be a relevant consideration but generally will not be determinative. For example, a person holding themselves out as an advisor would contribute to a reasonable investor’s belief that they are receiving professional or expert advisory services and that the person’s recommendations reflect the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances and may be relied on by the retirement investor as intended to advance the retirement investor’s best interest.

Sales Pitches and Investment Education
The final regulation includes a new provision confirming that sales recommendations that do not satisfy all the specific contexts for fiduciary advice will not lead to ERISA fiduciary status, and that the provision of investment information and education, without an investment recommendation, also will not result in ERISA fiduciary status. To avoid fiduciary status in connection with a sales pitch, the salesperson must not (i) acknowledge fiduciary status under ERISA or the Code or (ii) hold themselves out as making an individualized recommendation intended to advance the best interest of the customer based on the person’s professional or expert review of the investor’s particular needs or circumstances.

“Hire Me” Communications
An investment advice provider can recommend that a retirement investor enter an advisory relationship without acting as a fiduciary. But when the investment advice provider recommends that the investor pull money out of a plan or invest in a particular fund, that advice may be deemed given in a fiduciary capacity if that advice is part of a presentation in which the advisor is also recommending the person enter into an advisory relationship.

This means that when a recommendation to “hire me” includes a recommendation on how to manage plan or IRA assets (i.e., whether to roll assets into an IRA or plan or how to invest assets if rolled over), that recommendation would need to be evaluated separately under the final regulation.

It is important to keep in mind, however, that investment recommendations made during such interactions do not become ERISA fiduciary advice unless all the elements of the facts and circumstances test are met, and the advice provider receives compensation, direct or indirect, for the advice.

Disclaimers
Disclaimers are allowed under the final rule. However, written statements by a person disclaiming fiduciary status under ERISA, the Code or the final rule, or disclaiming the conditions in the final rule, 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. For example, a boilerplate disclaimer of fiduciary status will not defeat fiduciary status when the rest of the advice provider’s communications are calculated to reassure the investor that, in fact, the advice is precisely the sort of trustworthy advice that meets the regulatory standard.

To the extent that financial firms and professionals wish to avoid fiduciary status, they should take care to ensure that their disclaimers are consistent with their actions and communications. Express disclaimers in a response to a retirement plan investor’s request for proposal are allowed and would govern, provided the disclaimer is consistent with the other statements made and interactions around the response.

Fee or Other Compensation, Direct or Indirect
The fee or other compensation, direct or indirect, prong of the final rule is met if the person (or an affiliate) receives any explicit fee or compensation from any source in connection with or as or result of the recommended purchase or the provision of investment advice, including but not limited to: commissions, sales loads, finder’s fees, revenue sharing payments, shareholder servicing fees, marketing or distribution fees, mark-ups or mark-downs, underwriting compensation, payments to brokerage firms in return for shelf space, recruitment compensation paid in connection with transfers of accounts to a registered representative’s new broker-dealer firm, expense reimbursements, gifts and gratuities or other non-cash compensation (each and together, “Compensation”).

Compensation is related to a recommendation if it would not have been paid but for the recommended transaction or advice provided. This includes situations where eligibility for, or the amount of, the Compensation depends, in whole or in part, on the recommended transaction or the investment advice provided.

This definition includes transaction-based fees and non-transaction-based compensation models, including AUM fees, a flat fee or an hourly fee paid in connection with investment-related work. For transaction-based compensation, there must be a link between the Compensation and the financial professional’s recommendation.

Health and Welfare Plans and HSAs
Health and welfare plans and HSAs are included in the definition of a retirement investor under the final rule. While the DOL acknowledged that there are significant differences in how these plans operate as compared to retirement savings vehicles, and that HSAs may not commonly involve investment activity at all, these plans are covered by either ERISA or the prohibited transaction provisions of the Code.

Effective Date and Next Steps
The final rule is effective September 23, 2024. Although a lawsuit opposing the final rule has already been filed, this case may or may not delay the final rule’s effective date. So, with less than four months until the rule becomes legally binding, investment firms and professionals — particularly those selling insurance products — should begin to evaluate the impact of the rule on their operations immediately.

Upcoming eAlerts
Our next eAlert on the final DOL fiduciary rule will review amended PTE 2020-20, followed by a final eAlert covering other PTE amendments issued with the final DOL fiduciary rule.