The Department of Labor finalized its new Retirement Security rule today, expanding the definition of fiduciary to include brokers and insurance agents in a bid to protect retirement investors from conflicts of interest.
The updated definition of an investment advice fiduciary, which takes effect Sept. 23, will apply when advisors and agents give compensated investment advice to retirement plan participants, IRA owners and plan officials responsible for administering plans and managing their assets, the DOL said.
The DOL also amended related prohibited transaction class exemptions, requiring that fiduciaries who want to accept compensation that would otherwise be prohibited must avoid conflicts or comply with exemptions that require that advice be “prudent, loyal, honest and free from overcharges.”
“This rule protects 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,” Acting Labor Secretary Julie Su said in a statement.
Recent analysis by the Council of Economic Advisers found that conflicted advice in just one investment product—fixed index annuities—could cost savers up to $5 billion per year.
In a jab at the brokerage and annuities industry, which are threatening lawsuits to preserve their long-time carve-outs from a fiduciary requirement, the DOL promised that the rule “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.
“It’s unfair for firms and investment professionals that are working hard to give advice in retirement investors’ best interest to 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 DOL said.
In 2022, Americans rolled over about $779 billion from defined contribution plans such as 401(k)s into IRAs, the DOL reported.
“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,” Assistant Secretary for Employee Benefits Security Lisa M. Gomez said in a statement.
The CFP Board applauded the news. “The DOL’s final rule addresses regulatory gaps and helps protect Americans from the costly effects of conflicts of interest by requiring financial professionals to provide retirement investment advice in their clients’ best interest,” the certifying body said in a statement.
The American Retirement Association (ARA), which is also supporting the new rule. “We agree with the principle that informs the rule: investors are best served when the interests of advisors and investors are aligned, and the standards owed to investors should be product neutral,” ARA CEO Brian Graff said.
In contrast, Dale Brown, the president and CEO of the Financial Services Institute (FSI), which represents independent broker-dealers and advisors, said his trade group’s members “remains concerned that the final rule will have a negative impact on Main Street Americans’ access to financial advice as they attempt save for a dignified retirement.
“Our members already adhere to an extensive regulatory regime, including the U.S. Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg BI), and the DOL’s existing PTE 2020-02.”
Dan Zielinski, a spokesman for the Insured Retirement Institute, which represents the annuities industry, called the regulation “the product of a severely flawed rulemaking process and defies applicable judicial precedent and the limitations on DOL’s rulemaking authority as established by Congress. Instead of advancing this unnecessary and redundant rule today, DOL should have withdrawn it.”
Both FSI and IRI have threatened to sue the DOL to overturn the rule. FSI was a plaintiff to the industry lawsuit that in 2018 successfully vacated Obama-era regulations that expanded the fiduciary standard to broker-dealers and reps.