January 8, 2021
Recently, the U.S. Department of Labor (DOL) finalized its new fiduciary rule exemption, which will allow advisers to receive compensation for otherwise prohibited rollovers and replaces previously issued rules and guidance.
The new exemption is widely viewed as a substitute for the 2016 proposed fiduciary rule, which received mixed reactions from the financial industry and was ultimately taken off the table in 2018. The DOL’s new exemption, which affects retirement advisers, was designed to align with the U.S. Securities and Exchange Commission’s recently instated Regulation Best Interest for broker-dealers.
After the overturning of the 2016 rule, a 1975 provision was reinstated, marking those providing investment advice for a fee who meet certain conditions as fiduciaries under the Employee Retirement Income Security Act (ERISA). The new rule replaces this provision and maintains the requirements of a five-part test for investment advice fiduciaries who do not qualify as such under other regulations. The test requires that:
The final rule maintains the proposal’s provisions regarding rollovers, which allows advisers to make rollover recommendations for a fee, without violating their fiduciary duty. The final rule replaces rollover recommendation guidance from 2005, which stated advisers were permitted to be self-dealing if they already had a relationship with a participant or plan sponsor and then recommended a rollover into an investment that would pay the adviser more than other available investments.
This rulemaking also permits select principal transactions, allowing a fiduciary to trade certain securities from their own accounts to or from IRAs and retirement plans.
The rule also includes an exemption for prohibited transactions to allow investment advice fiduciaries to offer a broader range of investment advice services while meeting Impartial Conduct Standards. These standards include a best interest obligation, a reasonable compensation standard, and a requirement not to make any materially misleading statements.
WHAT DOES THIS MEAN FOR ME?
The aim of the DOL’s final rule is to create regulatory standards to ensure working and retired Americans have access to reliable investment recommendations and opportunities. The shift away from requiring that investments only be suitable, and toward enacting a higher standard of fiduciary duty, will likely continue among regulatory bodies in coming years.
The DOL’s new exemption will go into effect on Feb. 16, 2021. If your firm qualifies as a retirement adviser and is subject to ERISA guidelines, you may be affected by the exemption. If you need assistance or guidance in complying with these provisions, Fairview can help. Contact us today for more information about the DOL’s fiduciary requirements and ERISA guidelines.