If not for two district courts in Texas and the stays they put in place, most provisions of the Retirement Security Rule would have taken effect Sept. 23. Other elements of the rule would have taken effect next September.
The new rule would have replaced the previous five-part test for determining who is an ERISA fiduciary with a two-part test that captures anyone who claims to be a fiduciary and/or anyone who provides individualized retirement investment advice that is presented as being in the investor’s best interest.
The primary distinction between the five-part and two-part is that advice must no longer be provided “on a regular basis,” to qualify, meaning one-time recommendations, such as a recommendation to roll over assets, purchase an annuity, or purchase an investment menu design, would have been captured.
The DOL filed a notice of appeal on Sept. 20 to the U.S. 5th Circuit Court of Appeals to reverse the lower courts’ decision. The 5th Circuit had overturned the Department of Labor’s (DOL) previous attempt to change the definition of fiduciary in 2018, saying that a professional must have a relationship of “trust and confidence” with their client to qualify as a fiduciary. The DOL argues that the Retirement Security Rule only applies in those circumstances.
What Would Have Taken Effect
Jason Roberts, the CEO of the Pension Resource Institute, says that the new definition fiduciary investment advice would have governed going forward and many more transactions would have needed an exemption under PTE 2020-02.
This means that sponsors starting a plan would have been protected by ERISA starting today but are not currently in light of the ongoing litigation.
Protecting plan sponsors from conflicted advice was the primary basis for the American Retirement Association’s support for the Retirement Security rule. The ARA wrote to the DOL in January that “when a new retirement plan is established, an investment professional can provide advice regarding the specific investment options that will be offered to participants but not be treated as providing investment advice,” with ERISA protections because the relationship is not ongoing.
Smaller sponsors are especially vulnerable in this respect. Morningstar estimated that small plans would save about $55 billion in fees over ten years as a consequence of receiving fiduciary advice on plan creation. Under the status quo, “many plans pay unreasonably high fees,” Morningstar wrote.
What Fiduciaries Should Do
Roberts says that fiduciaries should follow the rules that are currently in effect while the Retirement Security Rule is in litigation, meaning the five-part test. In the event DOL is victorious in litigation, an outcome many consider unlikely, new compliance dates would be issued.
In the meantime, sponsors should know when an adviser is acting as a fiduciary and when they are not. David Certner, the legislative policy director at AARP, says that “if you want to get best interest advice, make sure you get an adviser that is adhering to that standard.”
In testimony to the ERISA Advisory Council earlier this month, Certner said of the rule being stayed that “once again, individuals are left to determine whether an adviser is truly acting in their best interest. We also know, particularly in the accumulation phase, that fees and costs can be the biggest driver of overall returns.”
Allison Wielobob, the general counsel for the ARA, says that “small plan sponsors are not protected by fiduciary standards,” either by the DOL or the Securities and Exchange Commission, when obtaining one-time recommendations on plan start up, “because there is no ongoing relationship.” Wielobob says if the interaction is a “single sales interaction, then they’re home free.”
Wielobob recommends that sponsors seek the assistance of a consultant or work with providers that agree to be a fiduciary in their service agreement.