News & Insights

DOL Finalizes New Fiduciary Rule: The Retirement Security Rule and Amended PTE 2020-02 to be Added to Federal Register

What happened?

On April 23, 2024, the White House announced that the Department of Labor (“DOL”) has finalized its Retirement Security Rule, also known as the “Fiduciary Rule.” The new rule extends the current definition of “investment advice fiduciary” under ERISA to include advisers when they “give investment advice for a fee to retirement plan participants, individual retirement account owners and others.” The rule and related exemptions will be effective on September 23, 2024, with a phase-in period for many of the exemptions and reporting requirements of one year until September of 2025.

Under the new rule, a financial services provider will be an “investment advice fiduciary” if they meet a three-part test:

  • the provider makes an investment recommendation to a retirement investor;
  • the recommendation is provided for a fee or other compensation, such as commissions; and
  • the financial services provider holds itself out as a trusted adviser by
    • specifically stating that it is acting as a fiduciary under Title I or II of ERISA; or
    • making the recommendation in a way that would indicate to a reasonable investor that it is acting as a trusted adviser making individualized recommendations based on the investor’s best interest.

The DOL proposed this change to the three-part test in October of 2023 and swiftly moved the proposed rule through the rulemaking process.  The rule updates the five-part test in the 1975 definition of fiduciary.  The new rule also closes the loophole for one-time investment advice.  Under the new definition, a recommendation to roll over assets from an employer retirement plan to an IRA, if the elements of the three-part test are met, would cause the adviser to be an “investment advice fiduciary.”

The new rule causes more advisers to be investment advice fiduciaries under ERISA, which means many more advisers will need the protections of a prohibited transaction exemption. Investment advice fiduciaries under ERISA may not increase their compensation due to their investment advice. To do so would be a prohibited transaction, unless the adviser satisfies an exemption.  This was the reason the DOL introduced the Prohibited Transaction Exemption (“DOL PTE 2020-02”) during their last attempt to expand the definition of investment advice fiduciary.  The good news is that many administrative prohibited transaction class exemptions are available.  The DOL specifically amended DOL PTE 2020-02 alongside the final rule.

The rule and amended exemptions have staggered deadlines during a “phase-in” period.  This one-year phase-in period is the same as the one-year compliance period the DOL provided when it originally granted DOL PTE 2020-02 four years ago.  An adviser may still receive reasonable compensation for otherwise prohibited transactions under the amended DOL PTE 2020-02 for one year from September 23, 2024, if the adviser meets the Impartial Conduct Standards and the fiduciary acknowledgment requirement under DOL PTE 2020-02.

Many are having déjà vu all over again.  Protecting retirement investors is a valid goal.  Critics still believe existing regulations already offer sufficient protection. With a final rule in place, everyone, including the DOL, is now waiting for the first lawsuit.

What does this mean for me? 

This is the DOL’s fourth attempt at a fiduciary rule since 2010. The first proposal was abandoned due to industry pressure. The second proposal became a final rule in 2016, and was vacated by the Fifth Circuit in 2018. The third attempt skipped the rulemaking process and used a reinterpretation of the existing rule to expand fiduciary status and grant an exemption for investment advice, DOL PTE 2020-02.  This was partly overturned by a Florida district court decision last year.  This fourth attempt is very likely to be challenged in court, and the result will be anyone’s guess.  For now, prepare for compliance with the impartial conduct standards and fiduciary acknowledgements in five months and the more burdensome written documentation and reporting requirements within seventeen months from now.

Fairview provides full-service compliance support for registered investment advisers by creating and implementing comprehensive, sustainable compliance programs, conducting ongoing testing, and conducting evaluations to ensure firms are remaining compliant with current regulations. If your firm requires assistance with understanding and implementing a compliance program, we can help. Contact us today for more information about our services.