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RETIREMENT PLAN INVESTOR

Use your plan ID (available on your account statement) to determine which employer-sponsored retirement plan website to use:

IF YOUR PLAN ID BEGINS WITH IRK, BRK, 1, 2 OR 754

Visit americanfunds.com/retire

IF YOUR PLAN ID BEGINS WITH 34 OR 135

Visit myretirement.americanfunds.com

Categories
Regulation & Legislation
Washington update: New fiduciary rule to go into effect
Jason Bortz
Senior Counsel
KEY TAKEAWAYS
  • The Biden administration is letting the rule go into effect.
  • The rule makes the first workable path to a fiduciary brokerage business model. 
  • We expect it to accelerate the growth of fee-based advisory business.

The Biden administration has announced that it will allow a fiduciary rule finalized at the end of the Trump administration to go into effect with compliance required by December 20, 2021. The announcement is somewhat surprising since some have been critical of the rule. 


The rule package provides new color on when investment recommendations to a retirement plan fiduciary, participant or IRA owner result in fiduciary status. It also provides an exemption for common transactions with potential conflicts of interest. Finally, it extends the existing DOL non-enforcement policy until December 20. 


The new rule affects both retirement plan and IRA professionals


Tightly coordinated with the newly enacted Regulation Best Interest (Reg BI), the DOL rule applies more broadly to registered investment advisers and brokers providing advice to retail clients as well as institutional retirement plan clients. While the rule makes it harder to avoid fiduciary status, it provides a reasonable method for satisfying the requirements of fiduciary status while continuing to receive non-fee-based compensation (commissions, 12b-1 fees, sub-transfer agency fees). 


The guidance would apply only to recommendations to retirement plans, participants and IRAs. This could have a significant impact on plan professionals because the new rule would be enforceable by plaintiffs in the retirement plan context. There is no private right of action to enforce the rule in the context of IRAs.


Essentially, most retirement plan professionals will either: 

  • Act as a fiduciary and rely on the proposed new exemption to continue receiving brokerage compensation, OR
  • Fully embrace a fiduciary fee-based business model and sidestep the requirements of the new exemption

Key aspects of the DOL rule


1) A reinstatement of the DOL’s five-part test for determining fiduciary status that was a critical part of the Employee Retirement and Income Security Act (ERISA) Code enacted in 1974. However, this rule also reinterprets the five-part test, expanding the definition of what would be considered fiduciary action. So now, for example, most retirement plan advice and many IRA rollover recommendations would be treated as fiduciary advice. 


2) An exemption that would allow investment fiduciaries to receive compensation for nondiscretionary investment advice, as long as they acknowledge fiduciary status in writing and adhere to the impartial conduct standards under current securities law: 

  • Advice must be solely in the best interest of the client, 
  • The compensation paid must be reasonable, and
  • Statements made about the transaction cannot be misleading. The exemption would be available to registered investment advisers, broker-dealer firms, insurance companies, banks and individuals who are their employees or agents.

3) Expanded regulation of rollovers will add to complex rules that are already in place. The guidance takes the position that all rollover recommendations where the financial professional and the investor reasonably expect an ongoing advice relationship (for example, a rollover to an advisory account) will be considered fiduciary recommendations. Moreover, the exemption requires that the financial professional document in writing why the rollover recommendation is in the investor’s best interests, taking into account the investments and fees in the plan. While this documentation is a best practice under Reg BI, the new rule takes it further by making it a requirement as well as mandating delivery of the written explanation to the investor. 


4) An annual review must be conducted to ensure compliance with the conditions of the new DOL rule, including exemption requirements. Specifically, a senior executive officer of the broker-dealer firm (such as its chief compliance officer) would need to sign off on the review.


What happens next is still uncertain 


Many firms and professionals may grapple with the implications of formally accepting the status of fiduciary. Such a position could increase exposure to class action lawsuits, even when advice is rendered in the spirit of the client’s best interests. 


Affected parties may be concerned that the DOL will propose further changes. We believe the financial services industry will likely advocate against making additional changes until the effects of Reg BI and the new fiduciary rule are evaluated. 


However, the Biden administration has indicated that it will evaluate whether additional changes are appropriate to the Trump rule. 


Perspectives on relevant fiduciary regulation


Investment Advisers Act of 1940

  • Type of professional affected: RIAs
  • Standard of care: Fiduciary
  • Treatment of conflicts of interest: Disclose firm and financial professionals’ conflicts of interest
  • Scope of obligation: Ongoing duty to monitor (absent agreements to the contrary)
  • Status: Current law

Reg BI

  • Type of professional affected: Brokers
  • Standard of care: Best interest
  • Treatment of conflicts of interest: Firm must have policies/procedures reasonably designed to mitigate financial professionals’ conflicts of interest
  • Scope of obligation: Transactional (absent agreement to the contrary)
  • Status: Became effective June 30, 2020

DOL fiduciary

  • Type of professional affected: RIAs and brokers and insurance agents (including retirement plan professionals)
  • Standard of care: Fiduciary
  • Treatment of conflicts of interest: Same as Reg BI but applies to firm and financial professionals’ conflicts
  • Scope of obligation: By agreement or mutual understanding
  • Status: Applicable on December 20, 2021

Massachusetts state rule

  • Type of professional affected: State registered investment advisers and brokers (including retirement plan professionals)
  • Standard of care: Fiduciary
  • Treatment of conflicts of interest: Advice must be given without regard to conflicts of interest
  • Scope of obligation: Transactional
  • Status: Enforced on September 1, 2020; other states either have or are considering proposing their own fiduciary standards


Jason Bortz is a senior counsel with 24 years of industry experience (as of 12/31/2021). He holds a juris doctor degree from Cornell Law School and a bachelor’s degree in philosophy from Hamilton College.


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