Labor Department Introduces Revised Fiduciary Investment Advice Exemption

The ongoing saga about fiduciary standards for advice related to retirement assets has a new chapter that plan sponsors need to be aware of.
In June, the Department of Labor (DOL) proposed a rule that would give plan sponsors and participants additional clarity about whether advice providers are held to a fiduciary standard. The DOL’s proposed rule also aligns with many elements of the Securities and Exchange Commission’s Regulation Best Interest (Reg BI).

Background and Overview of the DOL’s New Proposed “Fiduciary Rule”

The DOL’s proposal comes two years after a federal court invalidated the fiduciary rule set by the Obama Administration, which expanded the definition of a fiduciary. In 2018, the U.S. Appeals Court for the Fifth Circuit vacated the Obama Administration’s rule, reinstated the 1975 regulation and removed the Best Interest Contract Exemption (BICE).
In June, the DOL introduced a revised version and technical amendment that soften some of the standards set in the Obama Administration’s regulation. The proposed rule includes a new prohibited transaction class exemption for investment advice fiduciaries for work related to retirement plan assets.
To qualify for the exemption—and get paid for services—investment advice fiduciaries need to follow specific impartial conduct standards and act in the best interest of the participants. This relief would also apply to advice given when rolling assets from a plan to an individual retirement account (IRA). In addition, the technical amendment immediately reinstates the 1975 five-part test to determine fiduciary status as well as Bulletin 96-1 concerning participant investment education.
The vacated rule left many providers to decide on their own whether their services qualified them as a fiduciary, and many providers used the BICE to shield themselves from fiduciary disputes. The new proposal creates more clarity and assurances to plan sponsors and participants as to a provider’s fiduciary status, which is particularly important as it relates to rolling retirement assets to an IRA.

Alignment with Reg BI

The DOL proposal aligns with the SEC’s Reg BI, which sets a higher standard for broker-dealers, registered investment advisers and other advisers. Reg BI, which went into effect on June 30, bans brokers from putting their firm’s interests before the needs of their clients. It requires them to disclose key facts about their recommendations, exercise reasonable care when making decisions on behalf of clients, establish and enforce written policies to address conflicts of interest, and establish and enforce written policies to comply with the regulation.
The two rules complement each other, creating a more streamlined fiduciary standard for investment advice. This gives plan sponsors, participants and retail clients more assurance that they are receiving investment advice that is in their best interest.  

Next Steps for the Rule

The general public is welcome to submit comments at using Docket ID number: EBSA-2020-0003 by August 6.  The rule will become effective 60 days after the final version is published.