The DOL Retirement Security Rule Stalled

The U.S. Department of Labor (DOL) was stalled in its most recent attempt to redefine an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). Its recently adopted Retirement Security Rule and amendments to related prohibited transaction exemptions (PTEs) were stayed by two separate district courts. As a result of the stays, the Retirement Security Rule and the PTE amendments will not take effect on September 23, 2024, as planned.

Financial institutions and investment professionals should continue to operate under the existing ERISA framework until the litigation has been resolved, which is anticipated to take several months. According to reports, the DOL has not yet decided whether to appeal the stays.

Background

The Retirement Security Rule was meant to update “an outdated ERISA investment advice rule,” according to the DOL, and would change the definition of an investment advice fiduciary from the standard used for the past 50 years (i.e., the five-part test) to a more expansive definition that would also include rollover recommendations.

The existing five-part test

The ERISA investment advice rule states that a person is an Investment Advice Fiduciary if they: (1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property, (2) on a regular basis, (3) pursuant to a mutual agreement, arrangement, or understanding with the plan or a plan fiduciary, that (4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that (5) the advice will be individualized based on the particular needs of the plan. All elements of the five-part test must be satisfied for the investment advice provider to be a fiduciary within the meaning of the fiduciary definition.

The new definition of an Investment Advice Fiduciary under the Retirement Security Rule

A person is an investment advice fiduciary if (1) The person either directly or indirectly (e.g., through or together with any 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, reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest; or (ii) The person represents or acknowledges that they are acting as a fiduciary under Title I of ERISA, Title II of ERISA, or both, with respect to the recommendation, which must be provided for a fee or other compensation, direct or indirect.

Because registered investment advisers that provide discretionary investment advice to covered plans are already deemed to be fiduciaries, the rule change would have primarily impacted investment professionals, including independent insurance agents, that previously were not deemed to be fiduciaries and therefore not subject to ERISA.

Along with adopting the Retirement Security Rule, the DOL adopted amendments to PTEs available to investment advice fiduciaries, including PTE 2020-02 and PTE 84-24. Many financial institutions and investment professionals rely on these PTEs to receive compensation that would otherwise be prohibited under ERISA.

The court stays

On July 25, 2024, the U.S. Federal Court for the Eastern District of Texas issued a stay on the effective date of the Retirement Security Rule and the amendments to PTE 84-24. The next day, on July 26, 2024, the U.S. Federal Court for the Northern District Court of Texas in a separate action issued a stay on the effective date of Retirement Security Rule and the amendments to PTE 84-24 and PTE 2020-02, among others. The courts determined that the plaintiffs in both cases would likely succeed in their claims that the Retirement Security Rule conflicts with ERISA’s text by redefining an investment advice fiduciary and that the DOL overstepped in its exercise of regulatory power.

In addition to the stays, on February 13, 2023, the U.S. District Court for the Middle District of Florida, Tampa Division, issued an opinion in which the court vacated the policy referenced in FAQ 7 of the FAQs for PTE 2020-02 which extended the five-part test to a recommendation to roll plan assets to an IRA, in the context of an ongoing advice relationship.

Our guidance

Due to the stays of the Retirement Security Rule and related PTE amendments, the current standard for determining fiduciary status under the DOL’s five-part test remains, and the current, nonamended versions of the PTEs, including PTE 2020-02 and PTE 84-24, continue to apply.

Financial institutions and investment professionals that provide investment advice and receive compensation that would otherwise be prohibited under ERISA should continue to comply with the non-amended version of PTE 2020-02, until the litigation is resolved. ERISA policies and procedures, including those related to PTE 2020-02, should be reviewed to ensure they reflect current requirements and any impact on the policies and procedures resulting from the court actions.

How we help

The compliance environment has never been more complex or demanding. We can help you to navigate the evolving regulatory landscape while considering the complexity of your firm’s unique compliance requirements. ACA Signature can help.

With ACA Signature, you can choose the combination of compliance advisory, innovative technology, managed services, and cybersecurity to create a scalable solution that is right for your firm and gain expert insight, guidance, and support as you navigate emerging compliance and risk challenges.

Reach out to your ACA consultant, or contact us to find out how ACA Signature can help transform your firm’s compliance program.