DOL retirement security proposal to update fiduciary standard under ERISA

The new proposal would require a wider array of advisers to achieve high standards of care and loyalty when making investment recommendations.

On Tuesday, the Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) proposed a new rule that would protect workers’ retirement savings by updating the regulation defining a fiduciary under the Employee Retirement Income Security Act (ERISA).

The “Retirement Security Rule: Definition of an Investment Advice Fiduciary” would affect how investors get advice on their job-based retirement accounts and other retirement savings plans. It would also influence how investment advice providers must act if they have a conflict of interest. The proposed rule and related amendments on the exemptions available to investment advice fiduciaries spell out:

  • when advice providers are acting in a fiduciary role under federal pension laws; and
  • the conditions they must follow to protect retirement investors.

Don’t we already have a fiduciary standard?

Although SEC-registered investment advisers are obligated to abide by a strict fiduciary standard, many people who give investment advice and get paid for it are not considered investment advice fiduciaries under the DOL’s ERISA.

They are called advisers and financial planners, among other terms. But unlike the fiduciaries who legally must follow strict rules of conduct on standards of care and loyalty in making investment recommendations, these professionals can avoid such expansive duties and obligations. Those obligations include guarding against conflicts of interest, or making recommendations that favor the investment professional’s financial and other interests at the expense of the retirement saver.

The DOL says they should be held to the same standard when they give investment advice for a fee to retirement plan participants, individual retirement account owners, and others.

“Upon initial review, we are concerned that the Department’s newest proposal may go too far.”

SIFMA statement in response to DOL rule proposal

The DOL’s press release states that “[w]hile investment professionals deserve to be paid fairly for helping people meet their savings goals and retire with dignity, there are some financial advisers who put their interests before their clients’ interests.

The proposed rule would ensure investment professionals compete for business on a more level playing field, DOL says, instead of an “unbalanced system” that holds advisers to different standards based on their recommended products. Those products have changed remarkably since the current rule was crafted in 1975, at a time when IRAs were less common and 401(k) plans did not exist, so most Americans relied on traditional defined benefit pensions retirement savings.

“In today’s marketplace, individual plan participants and IRA owners – rather than professional money managers – are expected to make important, complex financial decisions and seek the help of expert advisers, making the proposed rulemaking necessary,” the DOL says.

Protecting retirement savers

When financial advisers put their interests before their clients’ interests, the DOL says, it can result in reduced returns and higher costs which are junk fees that chip away at many Americans’ savings. Analysis of just one investment product – fixed index annuities – suggests that conflicted advice could cost savers up to $5b per year for this product alone.

“This rule ensures that savers of all income levels can work confidently with investment professionals to grow their nest egg and prepare for the joyful retirement they deserve. America’s workers and their families should not have excess fees and lost investment returns chipping away at their retirement savings due to the cost of conflicted investment advice,” said Julie Su, Acting Secretary of Labor.

A major component to the goal of protecting retirement savers seeks to make the avoidance of conflicts of interest expectation more standard across retirement planning professionals. The proposed amendments would prohibit advisers from charging more than is reasonable for their services and from making misleading statements about fees and investment products’ risks and benefits.

In a blog post, the DOL says these proposed enhancement are good for advisers, and not just their clients, since it puts them all on a more level playing field in terms of the obligations and competition for clients. The blog tells investors: “Some advisers are already required to act in your best interest, but many others aren’t accountable to the same legal standard. It’s not easy to compete in a marketplace where your competition is not acting in their client’s best interest! Conflicted advice erodes the public’s confidence in the industry, which leads to worse results for savers and trustworthy investment professionals alike.”

SIFMA is not buying it

The Securities Industry and Financial Markets Authority (SIFMA), a trade association for broker-dealers, investment banks, and asset managers operating in the US and global capital markets, issued the following statement from president and CEO Kenneth E Bentsen Jr regarding the DOL’s proposed rule.

“Since DOL first proposed a change to the definition of fiduciary, the landscape has changed greatly, most notably with the introduction of the Regulation Best Interest (Reg BI). Reg BI implemented a best interest standard that did not exist at the time of the 2015 DOL re-proposal and foundationally improved the protections in place for retirement savers.

“SIFMA long supported a best interest standard of care for brokers. That standard is now in place – it is robust and expansive with significant duties and obligations imposed on broker-dealers that unquestionably enhances investor protection. Upon initial review, we are concerned that the Department’s newest proposal may go too far, inconsistent with existing federal regulations such as Reg BI and as a result could limit access to advice and education while also limiting investor choice in advisors.”

The SEC adopted Reg BI in June 2019 as part of a package of rulemakings, and the regulation became effective a year later. In broad terms, Reg BI raised the standard of conduct for broker-dealers in making investment recommendations to retail customers by imposing four primary obligations;

  • disclosure (disclose scope and terms);
  • care (exercise reasonable diligence and skill);
  • conflict of interest management;
  • compliance (create policies and procedures).

Implications of the rule change

To be sure, the proposed DOL rule could create a wider gap between the compliance and duty of care expectations of broker-dealers and other investment professionals, create even more of an incentive for the dually registered firms to align their standards of care to a new and even higher standard, and (as Bentsen mentions) could possibly push out of the business certain professionals who cannot meet the mandate’s stricter terms or adequately prove they have done so.

But conflicts of interest are a problematic aspect of investing using a paid adviser, and they are an ongoing concern of regulators and consumer-protection groups.

In July 2022, the SEC announced settled charges against registered investment adviser Private Advisor Group, LLC for breach of fiduciary duty to advisory clients when it invested certain wrap-program clients in higher-cost mutual fund share classes than were otherwise available, while failing to disclose the conflicts of interest associated with those investments.

In September 2022, the SEC charged investment adviser Perceptive Advisors LLC with failing to disclose conflicts of interest regarding its personnel’s ownership of sponsors of special purpose acquisition companies into which Perceptive advised its clients to invest.

“America’s workers and their families should not have excess fees and lost investment returns chipping away at their retirement savings due to the cost of conflicted investment advice.”

Julie Su, Acting Secretary of Labor

In June of this year, the securities regulator charged Insight Venture Management LLC with charging excess management fees and failing to disclose a conflict of interest to investors relating to its fee calculations.

The cases zeroed in on how these advisers did not provide their clients and investors with adequate information about material conflicts, chose higher-cost share classes instead of lower-cost ones, or inaccurately calculated management fees based on aggregated invested capital at the portfolio company level instead of at the individual portfolio investment security level.

The monetary impact of the extra fees is borne by the investors for years, perhaps many years, and all because they give investment advice and get paid for it, but are not covered by existing fiduciary duty rules.

This rule will be the subject of much debate during the 60-day period for public comments. DOL said it intends to hold a public hearing approximately 45 days after the proposals are published.