UPDATE: On August 8, I posted this blog article in contemplation of the DOL sending a new fiduciary proposal package to the Office of Management & Budget (OMB) in the White House. One month later, to the day, the receipt of the DOL’s proposed fiduciary rule and prohibited transactions was posted on the OMB’s website. In reviewing my blog article, I think it was spot on in predicting key elements of the fiduciary rule and the exemptions. However, that is still based on my crystal ball, since the changes new proposals won’t be known until they are vetted by the OMB and published in the Federal Register—probably 45 to 60 days from now. As this article suggests, the fiduciary proposal will likely say that rollover recommendations are fiduciary advice and that rollover recommendations to annuities will be subject to more stringent standards.

The DOL has not appealed the decision in the Florida Federal District Court that vacated its fiduciary “re-interpretation.” That re-interpretation, in effect, said that ongoing investment advice to a rollover IRA could be connected to the rollover recommendation to a participant such that the “regular basis” prong of the 5-part fiduciary test would be satisfied. For context, the DOL had previously said that, if a person was not already a fiduciary to a plan, a recommendation to a participant to rollover his or her benefits was a standalone recommendation and therefore did not satisfy the regular basis prong of the 5-part test.

The re-interpretation tried to connect the recommendation to the plan (that is, for the participant to rollover to an IRA) to subsequent investment advice to the rollover IRA and, in that way, to conclude that the rollover recommendation was part of a regular basis advice arrangement. However, the Court held that the “regular basis” test is applied separately to the plan and the IRA and advice to the two could not be connected.

While the remaining parts of the DOL’s fiduciary interpretation were not vacated in that case (and have not been in the companion Texas case), the effect of the court decision is that a rollover recommendation by a person who is not a fiduciary to a plan is not fiduciary advice (and as a result, the protection afforded by PTE 2020-02 is not needed). (Note, though, that ongoing nondiscretionary investment advice to a participant (or discretionary management of a participant’s account) would be considered to be fiduciary advice to a plan and it is likely that the DOL’s continuing view is that, if an advisor is a fiduciary to a participant’s account, a rollover recommendation to that participant would be fiduciary advice—and therefore the relief of PTE 2020-02 would be needed.)

In my view, the DOL continues to believe that rollovers are such significant financial decisions by participants (and perhaps the largest single financial decision of their lifetimes) that fiduciary protections are needed. To that end, this is what the DOL included on its Spring Regulatory Agenda with a target date of August 2023:

Title: Conflict of Interest in Investment Advice

Abstract: This rulemaking would amend the regulatory definition of the term fiduciary set forth at 29 CFR 2510.3-21(c) to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of section 3(21) of ERISA and section 4975(e)(3) of the Internal Revenue Code. The amendment would take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest. In conjunction with this rulemaking, EBSA also will evaluate available prohibited transaction class exemptions and propose amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors.

Breaking down the description of the rulemaking project, and reading between the lines, here is what I think the DOL is saying:

• The proposal will amend the regulation defining non-discretionary fiduciary status to say that (i) rollover recommendations are fiduciary advice and (ii) in some cases, one-time advice could be fiduciary advice (for example, if a plan hires an advisor to analyze and recommend specific investments or transactions).
• The proposal may, at least partially, rely on the SEC’s 2019 Regulation Best Interest (Reg BI) and Investment Adviser Interpretation, which say that (i) rollover recommendations are best interest and fiduciary advice, respectively, and (ii) one-time recommendations are subject to the best interest and fiduciary standards.
• The DOL will also amend existing prohibited transaction exemptions to impose more demanding requirements. For example, PTE 84-24 for the sale of annuities (and other insurance products) to plans and IRAs could be amended to (i) add the Impartial Conduct Standards (from PTE 2020-02); (ii) require that participants be told in writing the specific reasons why a rollover recommendation is their best interest (also from PTE 2020-02; (iii) acknowledge in writing that they are acting as fiduciaries (similar to the requirement in PTE 2020-02); (iv) disclose their conflicts of interest (also required by Reg BI, the Investment Adviser rules, and PTE 2020-02); and (v) require a heightened standard of review by insurance companies.

At the time of writing of this article, the proposals for defining fiduciary status and amending the exemptions have not been received by the OMB. But, when they are, it will be posted on the OMB website. We won’t know what the proposals actually say until 45-60 days later, but we will know that the formal process has started.

For now, it’s hurry up and wait.