After several abortive attempts over three presidential administrations, the Department of Labor (DOL) once again has issued a new Fiduciary Rule.
In 2016, Obama’s DOL issued its version of the Fiduciary Rule in the final year of his presidency. Within two years, however, the Fifth Circuit vacated that rule.
In the final year of its first term, the Trump administration also released a new Fiduciary Rule. However, it wasn’t finalized until December 2020, which left it for the incoming president to implement it. Needless to say, Trump’s Fiduciary Rule died on the vine.
Now it’s Biden’s turn to take a swing. His DOL made it known earlier this year it intended to release the final language on its update of the definition of a retirement plan fiduciary. It did so on April 25th. The new Fiduciary Rule becomes effective as of September 23, 2024.
What is the new Fiduciary Rule?
Formally called the “Retirement Security Rule,” it updates the nearly 50-year-old definition of investment advice fiduciary. This original 1975 rule was created when few people had individual retirement accounts and before 401(k) plans even existed.
Note that the Department of Labor has oversight over retirement plans, not retail plans. The Securities and Exchange Commission (SEC) handles regulations involving a broader consumer market, including non-retirement retail investors. The SEC addressed fiduciary matters when it promulgated Regulation Best Interest in 2019. Reg B-I received a tepid response. Will the DOL’s new Fiduciary Rule meet a similar reception?
“I hope that it goes further than ‘Best Interest’ rule,” says Stephen Herbert Akin, founder of Akin Investments in Charleston, South Carolina. “I talk with people all day and it is something that the public does not understand. Then I show them headlines of major firms paying FINRA or SEC fines.”
The DOL’s new rule seeks “to protect the millions of workers who are saving for retirement diligently and rely on advice from trusted professionals on how to invest their savings.”
“The DOL is particularly addressing investment advice given to employees and retirees who have 401(k) plan retirement assets and roll out of such funds into IRAs, annuities, and other investments,” says Jerry Schlichter, founding and managing partner of Schlichter Bogard in St. Louis. “The DOL rule protects retirement investors by defining anyone who gives such advice as a fiduciary who must adhere to stringent fiduciary requirements to act in the best interest of the individual.”
Does the new Fiduciary Rule protect you?
You should notice the impact of the new Fiduciary Rule when you take one of many specific actions regarding your retirement assets.
Schlichter says, “Retirement investors can expect to see that a person who advises on what to do with plan assets must: 1) base the advice on the individual needs of the investor; 2) act in the best interest of the investor; and 3) unequivocally state that he or she is acting as a fiduciary to the investor. This will benefit the investor by eliminating conflicts of interest, such as recommendations to buy products such as IRAs, which may be high priced, just because they result in high commissions to the advisor.”
One particular type of retirement-related action is most significantly affected by the new Fiduciary Rule. It can occur when you’re changing jobs or retiring. It’s what happens when you answer the question, “What should I do with my old 401(k)?”
“With the new rule, more investment advisers will be classified as fiduciaries when providing advice on retirement savings, especially in contexts such as rollover recommendations,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village, California. “Advisors will be required to prioritize the best interests of a client over their own personal financial gain. For retirement savers, this change may reduce the risk of receiving biased advice that could result from advisers’ conflicts of interest, ensuring that the advice they receive is aimed at maximizing their financial benefits, not the advisers’ commissions or fees.”
The act of deciding whether to take personal control over your retirement savings or leave your assets in your old plan will come with several additional layers of decision-making.
“In the case of rollover recommendations, retirement savers should expect to have the cost/benefit of staying in the plan explained by the advisor and weighed against the cost/benefit of rolling out into their recommended investment or insurance product,” says Jeff Coons, chief risk officer at High Probability Advisors in Pittsford, New York. “Hopefully, this will mean fewer retirement savers stuck with high cost investment products in their IRAs.”
This doesn’t mean the new Fiduciary Rule is all good news. There may be some bad news, depending on how retirement professionals respond to the new Rule.
“As was noted in the comments to the final rule, there is real potential downside to the new rule and its application to more financial professionals in retirement advice contexts,” says Michelle Capezza, of counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City. “Advisor fees for those newly coming under the parameters of the rule will likely increase to address the heightened fiduciary liability considerations and litigation risks, and access to their services and products for retirement investors may decrease. While employees with access to robust workplace retirement plans might not see a drastic change in available services where their employers engage large financial institutions that have already taken on fiduciary responsibility in certain contexts to serve the plan and the participants, workers in small plans or IRA investors might find it harder to obtain financial advisors or industry professionals willing to provide any retirement related advice and take on the increased liability.”
Will the new fiduciary rule survive?
Changing the manner in which they serve customers is just one way some in the industry may respond to the DOL’s new Fiduciary Rule. For others, particularly disgruntled industry associations, there is another tried-and-true method. Indeed, Representative Virginia Foxx, Chair of the House’s Education and the Workforce Committee, sees this new Rule as suffering the same fate as it 2016 predecessor.
Derek Jacques, attorney & principal owner at The Mitten Law Firm in Southgate, Michigan, says, “The insurance industry will most certainly appeal this rule and file lawsuits. Additionally, many of the provisions won’t take effect until April 2025, so the impact of the change won’t be felt for some time. Challenges are already being laid out in the press, where claims are being made that the rule change was rolled out too quickly, that consumers are ‘losing their choice’ in terms of service providers. They will most likely challenge the jurisdiction of the Labor Department and their authority in issuing rules of this nature.”
While the method may be criticized, the aim cannot be questioned.
“These changes are fundamentally about ensuring that retirement savers receive advice that is free from undue influence, based on clear and honest information, and held to a consistent, high standard of accountability,” says Bavetz. “As a result, savers should feel more confident and secure in the advice they receive, knowing it is intended to foster their financial well-being as they prepare for retirement.”
Whatever the fate of the new Fiduciary Rule, it’s clear there’s an objective that transcends politics. It may ultimately require government regulation. Or it may simply be solved by an informed market.