Regulation & Legislation
DOL’s fiduciary rule proposal: 6 takeaways for employers

The U.S. Department of Labor (DOL) recently proposed yet again to expand its fiduciary rule to include more types of investment advice and more people who provide that advice for a fee. While the proposal would primarily affect financial professionals, there are a few noteworthy areas for employers who offer workplace retirement plans. 


Proponents of the proposal say it would help mitigate conflicts of interest, while critics say it would reduce access to investment advice and education for investors.


The proposed rule is the latest in a series of attempts by the DOL to revise the nearly 50-year-old definition of a fiduciary. These efforts reflect changes in the marketplace since enactment of the current fiduciary rule in 1975, including the shift to defined contribution (DC) plans from traditional pensions and the growth of the individual retirement account (IRA) market largely through rollovers. The DOL’s last attempt to rewrite the rule was struck down by a federal appeals court in 2018.  


Timeline presents key events surrounding the U.S. Department of Labor’s (DOL) fiduciary rule and other regulations related to investment advice. The exhibit is titled “Fiduciary fatigue.” It displays the following events: 1974, the Employee Retirement Income Security Act (ERISA) is enacted; 1975, the U.S. Department of Labor implements a five-part test defining a fiduciary; 2010, DOL proposes an expanded definition of a fiduciary; 2011, DOL withdraws the proposal under pressure from Congress; 2016, DOL enacts a new fiduciary rule that applies a fiduciary standard to one-time recommendations like rollovers and annuity purchases; 2018, a federal appeals court strikes down the new rule; 2019, the Securities and Exchange Commission adopts Regulation Best Interest, requiring broker-dealers to place retail customers’ interests ahead of their own; 2020, DOL asserts that one-time rollover recommendations are fiduciary advice, but this is challenged in the courts; 2020, National Association of Insurance Commissioners clarifies that annuity sales recommendations must be in consumers’ best interests; 2023, two federal district courts reject DOL’s position that one-time rollover recommendations are fiduciary advice; 2023, the DOL makes a fourth attempt to expand the fiduciary rule.

Source: Capital Group. As of February 29, 2024.

Potential impacts on plan sponsors


Employers that offer workplace retirement plans could see several potential impacts if the DOL’s latest proposal takes effect. Here we highlight six key areas:


1. Human resources departments get a pass. The DOL’s proposal addresses a long-standing question about whether human resources (HR) employees are fiduciaries when they communicate with participants about investing in the company’s retirement plan. The DOL definitively states that HR employees are not fiduciaries for two reasons: first, they do not regularly offer investment recommendations as part of their jobs; and second, their salaries do not constitute a fee associated with providing investment advice to plan participants. This is a positive development for employers because it would make it easier for HR employees to discuss investment options with participants, such as recommending that employees who are overwhelmed by the available investment choices consider a target date fund. 


2. Unlike savings recommendations, distribution recommendations are viewed as fiduciary advice. A recommendation that a plan participant increase their saving rate would not be considered an investment recommendation under the DOL’s proposed rule. But the proposal does treat recommendations for distribution of a participant’s plan assets as a fiduciary investment recommendation even if no securities are discussed. In the DOL’s view, inherent in a distribution recommendation is a recommendation to sell securities. Among the potential implications, this could make it more difficult for a plan’s service providers to discuss drawdown strategies such as lifetime income options.


3. Rollover and annuity recommendations are under scrutiny.  A key aim of the proposal is to definitively apply a fiduciary standard to one-time recommendations for retirement plan rollovers and annuity purchases. While the DOL takes the position that these recommendations are fiduciary recommendations if there is ongoing advice in the rollover IRA, some courts have concluded that these recommendations currently fall outside the fiduciary standard because the existing rules require that investment advice be provided on an ongoing basis in the plan to rise to a fiduciary level. This clarification would be a welcome change for plan sponsors who want to keep retirees in their plan. It would require financial advisors to perform an in-depth comparison of the institutional retirement plan’s investment options, fees and services to those of a retail individual retirement account to determine whether a recommended rollover is in the investor’s best interests.


4. Recordkeepers and other service providers could be more constrained. Employers should also be aware of the potential impact on recordkeepers and other third-party vendors, who may be forced to decide whether and when they are acting as fiduciaries. For instance, a recordkeeper’s call center personnel could be fiduciaries under the proposed rule when they discuss plan-specific investments or rollovers. Even basic tools like drawdown calculators on recordkeepers’ participant-facing websites could be in the crosshairs if they were seen as providing individualized recommendations. 


5. Higher risk of co-fiduciary liability. A related concern for employers is the risk of liability associated with breaches of fiduciary duty by a vendor or service provider, such as a recordkeeper’s call center. For example, a recordkeeper making rollover recommendations to plan participants would be giving fiduciary advice under the DOL’s proposal. If that recordkeeper were a financial institution guiding participants to its own products, it could be in breach of its fiduciary duty to put the investor’s interests ahead of its own, potentially exposing the employer to liability. This could put the onus on plan sponsors to increase due diligence and monitoring of third-party service providers. 


6. Stance on investment education is reaffirmed. As part of its rulemaking, the DOL has reaffirmed its existing guidance regarding the distinction between investment education and advice. This maintains the sponsor’s ability to advise participants to do things like diversify their investments or even to hold suggested percentages of their account balances in certain asset classes, so long as they don’t suggest specific investment products. However, it is not completely clear how the existing education guidance aligns with the proposed fiduciary definition, so it may be prudent for employers to review their educational tools with an eye on this potential shift in the regulatory backdrop.


The future is uncertain


The DOL appears to be pursuing an accelerated timeline to get the proposed fiduciary rule expansion on the books. The rule could be finalized before midyear, and the DOL may hope to see compliance start before a potential change in administration following the U.S. presidential election in November. That said, the DOL will almost certainly face legal challenges given the strong objections from various corners of the financial services industry. This could result in a challenging compliance environment with interested stakeholders taking steps to comply with a rule that may well be revoked in the courts or reopened in a new administration.




Learn more about
Regulation & Legislation
Defined Benefit
Defined Contribution
Fiduciary Responsibility

A defined contribution plan is a workplace retirement plan to which the plan participant makes contributions, which may be partially or fully matched by the employer. 

 

A fiduciary is a provider of financial and investment advice with a legal obligation to place the interests of the investor ahead of its own.

 

An individual retirement account (IRA) is a tax-advantaged retirement savings vehicle.

 

A retirement plan rollover occurs when an investor transfers assets held in one eligible retirement account to another. 

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