DOL and Biden Administration Propose to Revamp Rollover and Annuity Investment Advice Standards

Doctor Frankenstein isn’t the only one bringing things back to life this Halloween.  On October 31, 2023, the U.S. Department of Labor (“DOL”) issued a proposed rule consisting of reforms intended to reduce fees and conflicts of interest with regard to retirement investment advice.  

At the heart of the proposed rule, which is referred to as the “Retirement Security Rule,” is an expansion of which types of investment advisors may be considered investment advice fiduciaries under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). In this regard, the Retirement Security Rule expands fiduciary duties by treating one-time individual retirement account (“IRA”) rollover advice the same as recurring investment advice.  Retirement plan participants leave their employers from time to time, and desire to roll their account balance over into an IRA with the assistance of investment advisors.  Such rollover transactions create the opportunity for the advisors to offer investment advice on a “one-time basis” outside of the scope of the fiduciary duties applicable to investment fiduciaries under ERISA.  The Retirement Security Rule would close this loophole and require even one-time advice to be made in the best interest of the plan participant.

For observers that may be getting a sense of déjà vu, DOL has gone down this route before.  In 2016, the Obama administration finalized a similar rule broadening the definition of an investment-related fiduciary which was ultimately struck down by the U.S. Court of Appeals for the Fifth Circuit in 2018.  DOL officials have commented that the Retirement Security Rule is more targeted in an effort to distinguish this proposed rule from its prior failed attempt to expand fiduciary duties.  DOL is positioning its new regulation as attaching to the retirement accounts themselves, rather than the investment advice, for justification.  The Fifth Circuit’s ruling required a “relationship of trust and confidence” to be shown prior to a fiduciary obligation being imposed, whereas DOL’s prior attempt at broadening fiduciary duties attached to anyone giving advice for a fee.  

Among other changes, the Retirement Security Rule also streamlines investment advice standards for securities, commodities, and insurance products at the federal level. Currently, the Securities and Exchange Commission’s Regulation Best Interest requires that advice with respect to securities such as mutual funds be made in the investor’s best interest. Consistent with that sentiment, the Retirement Security Rule will require a similar standard with regard to investment advice for commodities or insurance products like fixed index annuities.

Given the tumultuous history of the (attempted) regulation of fiduciary investment advice in recent years, should the Retirement Security Rule be finalized, we expect it to be headed to the courts for further scrutiny. Stay tuned for further developments on this proposal from the MMM Employee Benefits and Executive Compensation team.