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The Final DOL Fiduciary Rule is Here!

Source: McKonly & Asbury

On April 23, 2024, the US Department of Labor (DOL) issued a final rule (the Final Rule) expanding the definition of an “investment advice fiduciary” with respect to employee benefit plans and IRAs for purposes of determining who is a “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (ERISA). The Final Rule will apply to trusted financial services providers who give compensated investment advice to retirement plan participants, individual retirement account owners, and plan officials responsible for administering plans and managing their assets by ensuring that such advisors adhere to stringent conduct standards and mitigate conflicts of interest.

Prior to the Final Rule, a five-part test, which was enacted in 1975, was used to define the circumstances under which a person who rendered “investment advice” to an employee benefit plan was a fiduciary under ERISA. Under the five-part test, a person who provided investment advice to a plan for a fee was a fiduciary only if the person (1) rendered advice as to the value of securities or other property, or made 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 understanding with the plan or a plan fiduciary in which (4) the advice served as a primary basis for the plan’s investment decisions, and (5) the advice was individualized based on the particular needs of the plan.

The Final Rule
The Final Rule replaces the current five-part test and significantly broadens the individual(s) who may be a fiduciary under ERISA. Under the Final Rule, a person is an “investment advice fiduciary” if they make an investment recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property to a “retirement investor” (i.e., a plan, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary) for a fee or other compensation, direct or indirect, in one of the following contexts:

  1. The person either directly or indirectly (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:
    1. is based on review of the retirement investor’s particular needs or individual circumstances;
    2. reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances; and
    3. may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest; or
  2. 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.

In addition, the Final Rule closes the previous loophole for “one-time advice,” such that a person will be a fiduciary with respect to a recommendation to roll over assets from a workplace retirement plan to an IRA if the elements of the “investment advice fiduciary” standards described above are satisfied.

The Final Rule is expected to become effective on September 23, 2024, along with changes to related prohibited transaction exemptions (PTEs), except for PTE 2020-02 and PTE 84-24, for which there will be an additional one-year transition period where exemptive relief will require a written acknowledgement of fiduciary status and compliance with impartial conduct standards. Until the effective date, financial institutions and professionals are advised to begin reviewing their current processes and policies and consider what changes are necessary to comply with the Final Rule.

About the Author:

Steph Kramer

Steph joined McKonly & Asbury in 2016 and is currently a Manager in the firm’s Audit & Assurance Segment. Steph audits a broad spectrum of employee benefit plans, including 401(k), 403(b), retirement, profit sharing, health and welfare, and VEBA plans. She also serves on the firm’s Wellness Committee, a group committed to ensuring that firm employees have a variety of outlets to stay healthy, active, and fit.

Prior to joining the firm, Steph was a Supervisor in the Baltimore and Harrisburg offices of an international accounting firm, where she was an integral part of the firm’s employee benefit plan practice.

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