On April 25th, 2024, the Federal Register published a new final rule from the Employee Benefits Security Administration, within the Department of Labor, regarding when a person is a fiduciary within the scope of the Employee Retirement Income Security Act (ERISA).  The rule was published by the Department of Labor (DOL) on April 23rd, 2024. 

ERISA Background 

ERISA, or the Employee Retirement Income Security Act, is a law governing employee benefit plans in the workplace, including the common 401(k) plan used by millions of workers, along with other worker retirement programs including individual retirement accounts (IRAs). 

The law imposes special duties to those who are “fiduciaries”, people who provide advice on investment in exchange, including those who do so for compensation. 

From the recent DOL fact sheet discussing the need for the latest rule: 

The Department’s prior rule defining when an investment advice provider is an ERISA fiduciary was adopted in 1975, when the most common type of retirement plan was a defined benefit pension plan. These plans were primarily managed by professional money managers and funded by employers, who shouldered the risk of poor investment performance and shortfalls. IRAs were not commonplace and 401(k)-type plans did not even exist. 

In the decades since, 401(k)-type plans and IRAs have become the most common way in which workers save for retirement. In these plans, individual retirement investors, rather than professional money managers, are typically responsible for making important investment decisions regarding their retirement savings, and they, rather than their employers or plan officials, shoulder the risk of loss. 

… 

This nearly 50-year-old rule has not kept up with these important changes in the marketplace. For example, under the 1975 rule, a financial services provider was an investment advice fiduciary only if the advice was provided on a “regular basis” with respect to plan assets and there was “a mutual agreement, arrangement, or understanding” that the advice would serve as “a primary basis for investment decisions.” 

As a result, advice that was provided on a “one-time” basis, like many recommendations to roll retirement savings out of a workplace retirement plan and into an IRA, was typically not treated as fiduciary advice and therefore was not protected by ERISA’s fiduciary safeguards. Yet, one-time advice is often the most important advice the retirement investor will ever receive. 

DOL New ERISA Rule on Fiduciaries 

The new rule eliminates exemptions for those providing advice on a limited or one-time basis.  The rule changes who will be a fiduciary for investment advice based on if: 

1. The provider makes an investment recommendation to an investor 
2. The recommendation is provided for a free or other compensation (including commission), and 
3. The financial service provider presents itself as a trusted advisor by 
4. Stating that it is acting as a fiduciary, or 
5. Making recommendations in a way that would lead a reasonable investor to believe they were a trusted advisor acting on the investors best interest. 

In short, if a reasonable investor would believe the advice given was given in their best interest, and the advisor is compensated in some way including via commissions, then that advisor is a fiduciary of the retirement plan investor regardless of whether the advice is one-time or not on a regular basis. 

The DOL listed important differences with this latest rule, compared to the 2016 rules: 

1. “This final rulemaking limits fiduciary status to recommendations made by persons who effectively hold themselves out as occupying a position of trust and confidence with respect to the retirement investor, as described above. 
2. The final rule and exemptions, unlike the 2016 rulemaking, contain no contract or warranty requirements. The sole remedies for non-compliance are precisely those set forth in ERISA and the Code. Thus, in the context of advice to IRAs, the remedies include only the imposition of excise taxes under the Code. 
3. The broad advice exemption, PTE 2020-02, as finalized, specifically provides an exemption from the prohibited transaction rules for pure robo-advice relationships, unlike the 2016 rulemaking. 
4. Unlike the 2016 rulemaking, PTE 84-24 has been specially tailored for independent insurance agents and does not require insurance companies to assume fiduciary status with respect to these agents, an important concern of insurers with respect to the 2016 rulemaking.” 

As noted in the DOL’s list of changes, insurance companies independent insurance agents do not create fiduciaries duties for insurance companies whose products are offered are sold, and advice given through solely “robo-advice” relationships is provided exemptions. 

ERISA and 401k Law Firm 

To learn more about ERISA and 401(k) benefits disputes and remedies, schedule a comprehensive claims assessment with our knowledgeable employee benefits litigation lawyers at Schneider Wallace. Our attorneys are able to schedule meetings at our offices in California, Texas and Puerto Rico.