What plan sponsors should know about DOL’s new fiduciary proposal 

December 6, 2023

A new Department of Labor (DOL) proposal seeks to expand the scope of fiduciary investment advice under ERISA. The expanded definition would apply not just to retirement plans, but also to individual retirement accounts (IRAs) and health savings accounts (HSAs). Proposed amendments to seven prohibited transaction exemptions (PTEs) also accompany the proposal. The proposal primarily targets financial services firms, such as financial advisers, insurance agents and brokers, asset managers, and defined contribution (DC) plan recordkeepers. While the direct effect on plan sponsors appears modest, plan vendors may decide to modify their service models — including associated fees — and sales practices if the proposal is finalized as is. Public comments are due Jan. 2, 2024, and DOL is holding a virtual public hearing starting Dec. 12.

The proposal’s implications for plan sponsors include the following:

• The proposal isn’t limited to retirement plans: It would also apply to HSAs and ERISA-covered health and welfare benefit plans, but exclude recommendations about health and welfare plans that don’t have an investment component. Health insurance policies, for example, would not be subject to the proposal, as they don’t have an investment component.
• DC plan sponsors and service providers could still give participants nonfiduciary “investment education” under existing DOL guidance.
• Sponsors’ in-house human resources (HR) employees generally wouldn’t be deemed investment advice fiduciaries when interacting with participants.

Sponsors should be aware of potential vendor implications that could disrupt existing service arrangements, change the way sponsors select new vendors and limit plans’ investment opportunities. For example, each of the following could be considered fiduciary advice under the proposed rule:

• A one-time recommendation that participants roll over their retirement balance or take a distribution
• Some vendor services that are currently nonfiduciary, such as consultations with participants about plan distribution options
• Current and prospective vendors’ arm’s-length sales conversations with sponsors

The final rule and amended PTEs would take effect 60 days after publication, leaving sponsors and their vendors little time for implementation. This article provides background on DOL’s previous efforts to expand the 1975 rule, summarizes the proposal’s components and highlights key considerations for plan sponsors.

Under ERISA, anyone who provides investment advice for a fee or compensation is a fiduciary. A fiduciary must act prudently and solely in the interest of the plan and its participants — and can be held personally liable for failing to do so. ERISA also prohibits fiduciaries from using their authority to benefit themselves or receive consideration on account of their fiduciary status, unless they comply with an applicable PTE.

1975 investment advice regulation. Under DOL’s current regulatory definition of fiduciary investment advice, individuals and companies act as investment advice fiduciaries if they receive direct or indirect compensation for giving advice about the value of securities or other property of a plan, or for making recommendations to the plan about investing in, purchasing, or selling securities or other property, and meet either of these conditions:

• Exercise discretionary authority or control over purchasing or selling securities or other property of a plan
• Regularly give advice pursuant to a mutual agreement, arrangement, or understanding (whether written or otherwise) that the advice will serve as a primary basis for investment decisions regarding plan assets and be individualized for the plan

DOL originally adopted this definition in 1975. At that time, defined benefit (DB) plans were the dominant workplace retirement arrangement, and the regulation reflects this context. Decisions about investing DB plan assets are typically made by professional asset managers who give investment advice to plan fiduciaries.

The retirement landscape is much different today. Workers now rely more on Section 401(k)-type DC plans, IRAs and other deferral arrangements to save for retirement. Unlike DB plans, DC plans typically make participants responsible for their account investments. DOL believes the 1975 definition of fiduciary investment advice provides inadequate protection for DC plan participants, who routinely rely on advice received from investment professionals but don’t realize those advisors may have conflicts of interest.

Earlier attempt to expand investment advice definition vacated. Updating the regulatory definition of fiduciary investment advice has been a DOL priority for more than a decade: The agency proposed regulations in 2010 but later withdrew them and released a revised proposal. In 2016, DOL finalized a new regulatory definition that resulted in more advisors becoming investment advice fiduciaries who had to comply with a new “best interest contract” PTE. That rule applied not only to ERISA plans, but also to IRAs and HSAs. The 2016 rule eliminated the requirement that the advice be given on a “regular basis” to the recipient — a change intended to pull rollover recommendations into the definition of fiduciary advice, even if that recommendation is the only one an advisor made while the participant’s account was still part of an ERISA plan. However, a federal appeals court vacated the 2016 rule and related PTEs in 2018, reinstating the 1975 rule.

Continued focus on rollover recommendations. Despite the 2018 court decision, DOL has maintained its position that one-time rollover recommendations are fiduciary investment advice, even under the 1975 rule. DOL issued PTE 2020-02 to promote investment advice in the best interest of retirement investors. In the PTE’s preamble and related FAQs, DOL said it believes a rollover recommendation is fiduciary investment advice not only when an ongoing advice relationship existed beforehand, but also when the recommendation is the first instance of advice in a new relationship that’s expected to continue after the rollover. This differs from the agency’s position previously articulated in Advisory Opinion 2005-32A (known as the “Deseret letter”). The 2005 opinion said that as long as the person making the recommendation isn’t a plan fiduciary, advising a participant to take a distribution wouldn’t be fiduciary investment advice, even if that recommendation includes advice on investing the distribution’s proceeds. DOL withdrew this advisory opinion and never revived it after the court ruling that vacated the 2016 rule. Earlier this year, a federal court invalidated DOL’s FAQ guidance on one-time rollover recommendations, and a lawsuit challenging the related portion of PTE 2020-02’s preamble is still pending.

The proposal would replace the agency’s long-standing bright-line test for fiduciary investment advice with a new, more fact-dependent standard. Investment advice fiduciaries would need to rely on one of two amended PTEs for relief from the applicable prohibited transaction restrictions under ERISA and the Internal Revenue Code (IRC). 

An investment advice fiduciary would include anyone who receives direct or indirect compensation for making certain kinds of investment-related recommendations to a retirement investor under circumstances indicating the investor can reasonably have an expectation of trust and confidence in the recommendations. A person would have to meet each of four components (described in more detail below) to be deemed an investment advice fiduciary.

Retirement investors. The scope of retirement investors covered by the proposal is consistent with the 2016 regulation and includes:

• ERISA-covered plans, plan fiduciaries, participants and beneficiaries. While the proposal will mostly affect retirement plans, it also includes ERISA-covered health and welfare plans, but only if there is an investment component (e.g., certain permanent life and long-term care insurance policies, as well as VEBAs). Health insurance policies should not be affected as they don’t have an investment component. A sponsor presumably would be a retirement investor only when acting in a fiduciary capacity — rather than as a settlor — but clarification would be helpful.
• IRAs, HSAs, medical savings accounts (MSAs) and educational savings accounts (ESAs) covered under IRC Section 4975. Fiduciaries, owners and beneficiaries of these accounts also are considered retirement investors.

Investment recommendations. Only certain recommendations would cause a person to become an investment advice fiduciary. The proposed rule defines these as recommendations “of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property.”

• Broad scope of covered recommendations. The proposal covers a broad range of investment-related recommendations, such as recommending a distribution or rollover from an ERISA plan, a particular investment strategy, or another person to provide investment advice or investment management services. Valuation services, appraisal services or fairness opinions would not count as covered recommendations. (DOL believes these topics are best addressed through a separate regulatory project.)
• What is a recommendation? The preamble explains that a recommendation is “a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the retirement investor engage in or refrain from taking a particular course of action.” This is consistent with the 2016 regulation, including DOL’s position that the more a communication is individually tailored to a retirement investor, the more likely it is a recommendation. Like the 2016 regulation, the new proposal says that providing a retirement investor a selective list of securities — even without specifically recommending any particular security on that list — may be a covered recommendation. This may reduce DC recordkeepers’ willingness to provide fund selection and monitoring assistance (as discussed below).

Positions of trust and confidence. A person giving investment advice is not an investment advice fiduciary unless the person occupies one of three positions that DOL believes are reasonably indicative of a position of trust or confidence. The proposal also specifically disallows someone in one of these positions from using a written disclaimer to avoid fiduciary status.

• Discretionary asset managers. The first category includes individuals or companies with discretion — either directly or indirectly through an affiliate — over a retirement investor’s assets. This is similar to a component of the 1975 regulation, but DOL has proposed expanding the provision to encompass management of a retirement investor’s assets outside of a plan or an IRA. This change presumably is intended to cover financial advisors who manage an individual participant’s nonplan or non-IRA assets. But the proposal’s broad wording arguably could cover anyone managing a plan sponsor’s corporate assets. Sponsors with discretion — including indirectly through their employees — over a plan’s investments also appear to meet this requirement.
• Individuals and firms regularly making investment recommendations. The second category would encompass individuals or companies in the business of regularly making investment recommendations — either directly or indirectly through an affiliate — to investors. DOL explains that this reformulated standard “is an objective test based on the totality of the facts and circumstances” rather than a bright line. This standard is a broader than the 1975 rule, which requires providing the advice itself on a regular basis. As a result, the proposal would cover one-time recommendations not addressed by the 1975 rule, such as advice about a terminating DB plan’s annuity purchase or a recommendation that a participant roll over a plan distribution. Besides satisfying this reformulated “regular basis” requirement, the circumstances must indicate that the recommendation is based on the particular needs of the retirement investor, who may rely on it as a basis for making investment decisions in his or her best interest. This is also broader in scope than the 1975 rule, which requires a mutual agreement, arrangement or understanding that the advice will be the primary basis for investment decisions.
• Acknowledged fiduciaries. The third category applies to persons who represent or acknowledge that they are acting as fiduciaries when making covered recommendations. This is a new provision not reflected in the 1975 rule. DOL explains that a person would meet this standard even if the representation doesn’t specifically refer to ERISA.

Fee or compensation. A person is only an investment advice fiduciary if they — directly or indirectly — receive a fee or compensation in connection with or as a result of the advice. DOL defines this concept to include a wide variety of compensation, including commissions, loads, revenue-sharing payments, expense reimbursements, gifts and gratuities, and noncash compensation. Compensation would qualify if the person wouldn’t have received it absent the recommendation or provision of advice. Compensation would also count if the person’s eligibility to receive it (or the amount received) is based on the recommendation or provision of advice. The proposal doesn’t require the plan to pay the fee or compensation for the recommendation to be investment advice.

Investment advice fiduciaries must comply with an applicable PTE to receive compensation for their advice. In addition to expanding the scope of fiduciary investment advice, DOL is proposing to reduce the number of available PTEs from seven to two, requiring investment advice fiduciaries to comply with a uniform “best interest” standard, regardless of the types of investment products recommended to retirement investors.

Only two PTEs will cover investment advice. Only two PTEs would remain available to investment advice fiduciaries: PTEs 2020-02 and 84-24. DOL is proposing changes to both PTEs.

• PTE 2020-02 allows investment advice fiduciaries to receive certain compensation for their advice — including advice to roll over ERISA-plan assets — that is in a retirement investor’s best interest. The amended PTE would include new conditions and require additional disclosures, reflecting the likely increased use of this exemption if DOL finalizes the proposal in its current form. However, sponsors wouldn’t be able to rely on this PTE to provide investment advice to their participants: The PTE excludes situations where the investment advice provider is an employer of employees covered by the plan or is the plan’s named fiduciary or administrator.
• PTE 84-24 is a long-standing exemption that allows insurance agents and brokers to receive compensation in connection with a plan’s or IRA’s purchase of certain insurance products and mutual funds. DOL proposes to narrow the scope so that only independent insurance agents that recommend certain types of annuities to retirement investors on a commission or fee basis could use the PTE for investment advice.

Five PTEs will no longer cover investment advice. The agency also proposes narrowing five PTEs commonly used by fiduciaries for particular types of investment transactions. These PTEs would no longer provide relief for investment advice transactions. Instead, investment advice fiduciaries who have been relying on these PTEs would have to comply with the more stringent conditions of revised PTE 2020-02 or PTE 84-24, as applicable.

While the proposal primarily targets financial services firms, certain aspects of the proposal have particular relevance for sponsors.

Nonfiduciary investment education guidance unchanged. In 1996, DOL issued Interpretive Bulletin (IB) 96-1 to encourage sponsors and their vendors to provide certain nonfiduciary investment education — including general financial and investment information — to participants. In the preamble to the new proposal, the agency notes it intends to leave IB 96-1 in place (in contrast, the 2016 rule incorporated investment education directly into the text of the regulation and removed the IB). Under the proposal, both DC plan sponsors and service providers could continue to provide participants the types of investment education identified in the IB, without becoming investment advice fiduciaries. DOL asks whether commenters agree that the types of educational materials described in the IB wouldn’t be covered recommendations under the proposed rule. DOL also asks whether the IB “provides sufficient and appropriate guidance” in conjunction with the proposal or should be amended or incorporated into the regulation.

However, DOL cautions that firms and individuals who “systematically exceed the bounds of education” and give participants advice on a specific investment or investment strategy wouldn’t be exempt from fiduciary liability under the proposal. It’s unclear whether DOL believes this might include targeting educational materials to participants based on their individual circumstances (for instance, sending materials about diversification to a participant who is fully invested in a money market fund). DOL confirms that a sponsor wouldn’t become an investment advice fiduciary merely because a vendor occasionally crosses the line and provides investment advice, but the agency emphasizes the sponsor’s duty to prudently select and monitor all vendors, regardless of a vendor’s fiduciary status.

HR employee interactions with participants aren’t advice. Some sponsors’ interactions with participants go beyond simple investment education and involve personalized discussions, such as conversations about whether to take a distribution and, if so, how much to take and in what form (such as a lump sum, installments or an annuity). Unlike the 2016 regulation, the proposed rule’s text doesn’t have express carve-outs for these discussions with a sponsor’s employees. However, in the preamble, DOL explains that the proposal isn’t intended to make a sponsor’s HR employees investment advice fiduciaries for the following reasons:

• A sponsor’s HR employees wouldn’t provide investment advice because they “do not make investment recommendations to investors as part of their business.”
• Salaries of the sponsor’s HR employees wouldn’t be covered compensation under the proposal. The same analysis presumably could apply to the salaries of employees who furnish investment research and analysis to plan fiduciaries, such as a plan’s investment committee.

While the direct effect on sponsors appears minimal, plan vendors will likely need to evaluate their service models and sales activities if the proposal is finalized in its current form. This could affect existing services arrangements and change the way sponsors select new vendors.

Sponsors can expect vendors to make changes. If the proposal is finalized without changes, plan vendors would have to decide whether to modify their sales practices and service models — including associated fees. That decision would likely reflect a vendor’s willingness to accept investment advice fiduciary status (and comply with amended PTE 2020-02) or preference to avoid such fiduciary status altogether. As a result, sponsors could expect renegotiation of existing vendor contracts and changes to participant communications.

No exceptions for routine sponsor interactions. The proposal’s scope would sweep in many common service provider interactions, including arm’s-length sales conversations. Unlike the 2016 regulation, the proposal doesn’t include express carve-outs for a vendor’s interactions with sophisticated plan fiduciaries (for instance, fiduciaries with responsibility for at least $50 million). The proposal also omits any exceptions for platform providers — such as DC recordkeepers and pooled plan providers (PPPs) — to assist with fund selection and monitoring or furnish sample investment lineups in response to requests for proposals (RFPs). The lack of such bright-line exceptions would introduce more uncertainty for plan vendors’ interactions with sponsors and could result in less robust RFP responses.

Amending ERISA’s definition of fiduciary investment advice is a top priority for DOL and the Biden administration, which announced the proposal’s release in a White House ceremony on Oct. 31. The White House also posted a fact sheet explaining the proposal’s objective to “minimize junk fees in retirement products, promote competition, and protect American workers’ retirements.”

DOL’s decision to hold a public hearing before the end of the comment period suggests the agency is moving quickly to finalize the proposed changes within a time frame that would prevent a potential Republican Congress and President from using special fast-track legislative rules to roll them back in 2025. DOL recently denied a request from a coalition of 18 trade groups to extend the comment period by 60 days and delay the hearing until after comments are due.

The proposal is already facing criticism from some members of Congress, and stakeholders will almost certainly file lawsuits challenging any final rule. DOL appears to have anticipated such a legal challenge by indicating that the different components of the proposed rule and PTE changes are intended to be severable, meaning a court decision invalidating a particular provision wouldn’t necessarily vacate the entire rule.

• Proposed rule (Federal Register, Nov. 3, 2023)
• Proposed amendment to PTE 2020-02 (Federal Register, Nov. 3, 2023)
• Proposed amendment to PTE 84-24 (Federal Register, Nov. 3, 2023)
• Proposed amendment to PTEs 75-1, 77-4, 80-83, 83-1 and 86-128 (Federal Register, Nov. 3, 2023)
• Announcement of hearing (Federal Register, Nov. 20, 2023)
• Press release (DOL, Oct. 31, 2023)
• Fact sheet (DOL, Oct. 31, 2023)
• Fact sheet (White House, Oct. 31, 2023)

• Court overturns DOL guidance on rollover advice (Feb. 28, 2023)

• Navigating the new world at work (Nov. 29, 2023)