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The DOL’s Proposed Retirement Security Rule: What Financial Advisors Need to Know

The U.S. Department of Labor (DOL) recently proposed a new fiduciary rule on October 31,2023 that attempts to redefine the criteria used to identify fiduciary investment advice. The proposal’s goal is to help ensure that financial professionals prioritize their client’s best interests in retirement planning over their own financial gain.

The Retirement Security Rule expands the definition of investment advice fiduciary, making more people subject to the Employee Retirement Income Security Act’s (ERISA) fiduciary standards. It also proposed amendments to prohibited transaction exemptions.

Because of the possible impacts if the rule is passed, here are some important things  financial advisors need to know:

The Current Status as of November 2023

The Retirement Security Rule is open for comments until January 2, 2024, with a public hearing taking place on December 12-13, 2023.

In November, the U.S. House of Representatives passed a vote to add an amendment to a bill. This amendment aims to kill this rule proposed by the DOL. However, that bill has not passed the Senate and it’s possible it never will. Even if the Senate ratified it and the President signed it, it still has a long road ahead.

But, if everything goes according to the DOL’s plan, the proposed rule could be implemented as early as March 2024.

Proposed New Fiduciary Test

The proposed rule would modify the requirements of the Five-Part Test from 1975. This modification would make the requirements vague to describe professionals in the retirement planning space.

Under this new rule, if you meet the criteria in the following 3-part test, ERISA considers you a fiduciary and you must follow its standards.

  1. Provides investment advice or makes an investment recommendation to a plan participant or IRA owner.
  2. Receive a fee or other compensation for that advice.
  3. Provide that advice on a regular basis as part of your business.

This new proposal would then also include professionals performing rollovers as fiduciaries and hold them to those standards.

Key changes to the proposed fiduciary rule

These key changes in the retirement security rule aim to enhance retirement savings and protect the interests of investors:

  • Expanding who is considered a fiduciary: The proposed rule broadens the definition of who is considered an investment advice fiduciary, especially in relation to rollover advice.
  • New disclosure requirements: There are extensive disclosure requirements, including acknowledging fiduciary status, describing services and products, disclosing commissions in both percentage and dollar amounts, and providing a detailed rollover assessment to clients.
  • Supervision requirements for insurance companies: Insurance companies will have to conduct thorough reviews of transactions, ensure compliance with impartial conduct standards, evaluate producers annually, and conduct retrospective reviews. They must also report instances of non-compliance and may face disqualification for consistent violations.
  • Restrictions on incentives: The proposed rule may limit compensation and incentives for financial professionals. It restricts things like bonuses, quotas, and other incentives that could influence advice.
  • Self-correction and reporting: There are provisions for self-correction of violations and reporting violations to both the insurance company and the Department of Labor.

Potential Implications of New Retirement Security Rule

While the fate of the DOL’s Retirement Security Rule remains uncertain, it’s wise to consider its possible implications for advisors and their client’s sake:

1. Fiduciary Responsibilities: The proposed rule aims to modify the criteria for identifying fiduciary investment advice. If enacted, this could redefine the responsibilities and obligations of financial advisors when providing investment advice.

 2. Changes to Prohibited Transaction Exemptions: The rule also seeks substantial changes to existing prohibited transaction exemptions outlined in the Employee Retirement Income Security Act (ERISA) and the tax code. Advisors may need to adapt their strategies and practices to align with these alterations.

3. Client Impact: Ultimately, any regulatory changes can affect clients’ retirement plans, investment options, and overall financial security. Being well-versed in the potential impacts of the rule will help advisors provide informed guidance to their clients.

4. Compensation changes: changes to PTE 84-24 and PTE 2020-02 in the proposed rule would also allow a fiduciary to be paid for recommending and advising clients on fixed and fixed indexed annuities.

Stay Informed and Prepared

While the future with the DOL’s Retirement Security Rule remains to be seen, proactive financial advisors should stay informed and prepared. Regulatory changes can significantly impact both industry practices and the financial well-being of clients.

Monitoring updates and remaining adaptable in strategy are key steps to ensure the best outcomes for both advisors and their clients.

In the world of finance, change is constant. C2P can help you navigate these changes with knowledge, foresight, and tools to stay ahead in the financial services industry and continue to put your client’s best interest first.

For more resources C2P offers, book a call, and subscribe to the C2P podcasts to stay up to date on all the latest news and insights from industry leaders.

Financial Professional Use Only

The information provided in this presentation is not intended as investment advice or legal advice. The information provided is for informational and training purposes only. The information in this presentation was accurate as of the time the material was created. Tax laws and rulings can frequently change. Please discuss the client’s current situation with an accountant or tax advisor.

Sources

  1. https://www.proskauer.com/blog/game-of-tomes-a-guide-to-the-dols-retirement-security-rule-proposal#:~:text=Very%20generally%20speaking%2C%20the%20Proposed,%2Ddealing%20prohibited%20transaction%20rules).
  2. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/retirement-security-proposed-rule-and-proposed-amendments-to-class-pte-for-investment-advice-fiduciaries
  3. https://www.dol.gov/newsroom/releases/ebsa/ebsa20231031
  4. https://www.klgates.com/Here-We-Go-Again-DOL-Proposes-New-Fiduciary-Rule-11-8-2023#:~:text=Under%20the%20five%2Dpart%20test,on%20a%20regular%20basis%20(3)