BIDEN-HARRIS ADMINISTRATION ANNOUNCES RULE TO PROTECT RETIREMENT SAVERS’ INTERESTS BY UPDATING INVESTMENT ADVICE FIDUCIARY DEFINITION

Department of Labor rule protects retirement investors’ savings

The Biden-Harris administration announced today that the U.S. Department of Labor has finalized its Retirement Security Rule 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.  This final rule will achieve this by updating the definition of an investment advice fiduciary under the Employee Retirement Income Security Act and the Internal Revenue Code.  The final rule and related amended prohibited transaction exemptions require trusted investment advice providers to give prudent, loyal, honest advice free from overcharges.  These fiduciaries must adhere to high standards of care and loyalty when they recommend investments and avoid recommendations that favor the investment advice providers’ interests — financial or otherwise — at the retirement savers’ expense.  Under the final rule and amended exemptions, financial institutions overseeing investment advice providers must have policies and procedures to manage conflicts of interest and ensure providers follow these guidelines.  The updated definition of an investment advice fiduciary, which takes effect on Sept. 23, 2024, applies when trusted financial services providers give compensated investment advice to retirement plan participants, individual retirement account owners and plan officials responsible for administering plans and managing their assets.

“America’s workers and their families rely on investment professionals for guidance as they save for retirement,” said Acting Secretary Julie Su.  “This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest.  Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions.”

The rule aligns with the Biden-Harris administration’s effort to protect retirement investors and put more money into the pockets of workers and their families.  While acknowledging that investment professionals deserve to be paid fairly for helping retirement investors meet their savings goals and retire with dignity, the effort seeks to prevent advice providers from putting their interests before their clients’.  Recent analysis by the Council of Economic Advisers of just one investment product — fixed index annuities — suggests that conflicted advice could cost savers up to $5 billion per year.  Such conflicts can reduce retirement investors’ returns and increase costs that chip away at many workers’ savings.  The rule also ensures investment professionals can compete for business on a level playing field, instead of being hindered by a skewed system in which different standards exist for advice providers based on the products they recommend.  Firms and investment professionals that are working hard to give advice in retirement investors’ best interest should not be penalized for responsibly managing their conflicts of interest and making prudent and loyal recommendations.  Retirement investors are best protected by a uniform and protective framework.  The current definition of investment advice fiduciary, adopted in 1975, was written when individual retirement accounts were less common and before 401(k) plans existed.  Most people relied on traditional pensions for retirement security.  Today, individual plan participants and IRA owners — not professional money managers — are expected to make important, complex financial decisions, and they seek help from expert advisers, which made updating this rule necessary.

“These new rules update regulations created nearly a half-century ago that simply are not providing the protections America’s workers need and deserve for their retirement savings so that they can retire with dignity,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez.  “The investment landscape has changed, the retirement landscape has changed, and it is critical that our regulations are responsive to those changes so that workers can reach the secure retirement that they work for decades to finally achieve.”

The department has also amended related existing administrative prohibited transaction class exemptions that are available to investment advice fiduciaries.  The amendments make the exemption conditions more uniform and protective.  Under ERISA and the Code, investment advice fiduciaries must avoid conflicts of interest or comply with an exemption’s conditions to receive compensation that otherwise would be prohibited.  The amended exemptions require investment advice fiduciaries to provide retirement investors with advice that is prudent, loyal, honest, and free from overcharges.  The Federal Register will publish the final rule and amended prohibited transaction exemptions on April 25, 2024.  Learn more about EBSA’s final Retirement Security Rule.