Understanding the Department of Labor Fiduciary Rule

Information on the Fiduciary Rule as of July 2024.

Update: In late July 2024, two federal district courts in Texas issued rulings staying the effective date of the Department of Labor’s (DOL’s) Retirement Security Rule: Definition of an Investment Advice Fiduciary (the “Rule”), which was to go into effect on September 23, 2024. The rule defines who is an investment advice fiduciary for the purposes of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. In May 2024, various insurance-related entities filed two separate lawsuits in federal courts in Texas seeking to invalidate the rule on the ground that its definition of “investment advice fiduciary” is overbroad. The stays issued by the courts relieve the industry from having to comply with the rule until the courts rule on the merits of the lawsuits. In granting the stay, the courts expressed the view that the Plaintiffs are likely to succeed on the merits of their claims that the rule is invalid.

On April 25, 2024, the DOL published the Retirement Security Rule: Definition of an Investment Advice Fiduciary. Fidelity Investments provided an initial overview and has been reviewing the details and impact of the rule. The rule expands the definition of who is an investment advice fiduciary for the purposes of providing investment advice to a plan or an IRA under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC). The DOL also made changes to a number of prohibited transaction exemptions available to investment advice fiduciaries, including the Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”), which the DOL intends to be the primary source of exemptive relief for investment advice fiduciaries going forward.

The Rule

Generally, under ERISA and the IRC, a person is an investment advice fiduciary to the extent that they render investment advice for a fee or other compensation, direct or indirect, with respect to plan assets, or have the authority or the responsibility to do so.

Since 1975, DOL regulations generally defined when a person provided fiduciary investment advice through a five-part test. The rule replaces the DOL’s five-part test with a new definition under which a person is an investment advice fiduciary if, for a fee or other compensation, the person:

While the rule does not define “recommendation,” the DOL states in the preamble to the rule that whether a communication with a retirement investor is a recommendation will depend on the specific facts of the interaction and will focus on whether there is a call to action. The DOL also noted that the more individualized a communication is, the greater the likelihood that it will rise to the level of a recommendation. In the rule, the DOL confirms that it intends the rule to apply to a broad scope of recommendations, including recommendations to roll over assets from a workplace plan into an IRA, recommendations to purchase retirement annuities such as fixed indexed annuities, and recommendations of other investments that may not already be covered by the U.S. Securities and Exchange Commission’s Regulation Best Interest (such as real estate, certain certificates of deposit, and other bank products).

PTE 2020-02 Amendments

In conjunction with issuing the rule, the DOL also finalized amendments to prohibited transaction exemptions available to investment advice fiduciaries, including PTE 2020-02, “Improving Investment Advice for Workers & Retirees.” Generally, PTE 2020-02 allows a person or entity to provide fiduciary investment and distribution advice to ERISA plans, ERISA plan participants, and IRAs and to receive otherwise-prohibited compensation if certain conditions are met.

Given that the rule expands the scope of recommendations that will be deemed fiduciary advice, PTE 2020-02 will become more of a focus for entities that seek to provide fiduciary investment advice. The DOL views the amended PTE 2020-02 as providing a more uniform regulatory structure to ensure that investment advice fiduciaries are held to a common set of standards.

The PTE 2020-02 final amendments make several changes to the exemption, including:

• Expanding the availability of PTE 2020-02 to cover recommendations provided in connection with online-only advice arrangements (as opposed to limiting the exemption to advice provided through live representatives)
• Allowing pooled plan providers to provide investment advice
• Updating disclosure requirements, including with respect to timing, compensation, and conflicts of interest
• Updating the correction procedure to permit self-correction of PTE 2020-02 violations without reporting to the DOL

Status of Fidelity Services

Fidelity provides a variety of assistance with respect to investment options to plan sponsors in a non-fiduciary capacity under ERISA. We are in the process of reviewing our current practices under the rule, but at this time we do not anticipate that the rule will have a significant impact on the nature of our interactions with plan sponsor clients.

Where we have been retained to do so by a plan sponsor, Fidelity provides advice in a fiduciary capacity under ERISA to plan participants regarding certain in-plan investment recommendations and distribution recommendations. We are in the process of reviewing our current practices under the rule, but at this time we do not anticipate that the rule will have a significant impact on our in-plan investment advice services or distribution advice services. Further, we are considering how the expansion of PTE 2020-02 to cover online-only fiduciary recommendations may impact our current service offerings.

The Final Rule is effective September 23, 2024. The amendments to the prohibited transaction exemptions are also effective September 23, 2024, however, there is a one-year transition period after the effective date during which parties will not need to comply with all of the operational requirements of the amended exemptions in order to avoid engaging in a prohibited transaction.

Fidelity will continue to review the impact of the rule and provide updates regarding any necessary changes to our services. We are also monitoring and reviewing any developments related to the rule and will continue to provide any material updates.