The New Fiduciary Rule (23): The Final Rule Has Been Sent to the OMB

In November 2023, the U.S. Department of Labor released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers). On March 8, 2024, the DOL sent the final rule to the Office of Management and Budget in the White House.

Key Takeaways

  • In a little over 2 months, the DOL finalized it proposed fiduciary rules—the Retirement Security Rule: Definition of an Investment Advice Fiduciary.
  • That 2-month turnaround is very fast as compared to the usual time frames, suggesting that the OMB review may also move quickly.
  • The OMB has up to 90 days to review rules, but this suggests that its review could be done in 45 days, give a week or two.
  • While we know that the final rule is at the OMB, we don’t know what it says or how it changed from the proposals. We will only know that after it is published in the Federal Register when the OMB review is completed.

The Department of Labor has sent its final versions of the fiduciary proposal to the White House’s Office of Management and Budget (OMB) for review. While the OMB’s website just refers to the “Retirement Security Rule: Definition of an Investment Fiduciary”—the name of the fiduciary regulation—it is likely that the rules sent for regulatory review included the prohibited transaction exemptions as well. The RIN (1212-AC02) for the final rule is the same one in the Regulatory Agenda that included the exemptions.

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ERISA Moments Ep. 18: Plan Sponsors and SECURE 2.0: IRS “Grab Bag” Guidance

Take a quick dive into the exciting world of ERISA with Faegre Drinker benefits and executive compensation attorneys Fred Reish and Brad Campbell. In this quick-hit series of updates, Fred and Brad offer a high-level view of current trends and recent ERISA developments.

See the newest episode, Plan Sponsors and SECURE 2.0: IRS “Grab Bag” Guidance, on the Spotlight on Benefits blog.

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The New Fiduciary Rule (22): Can Wholesalers Become Fiduciaries

The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • It is, by now, well known that the expansive definition of fiduciary in the DOL’s proposed regulation will cause many more advisors and insurance agents to be fiduciaries for their recommendations to retirement investors. However, it is less known that the same rules can apply to wholesalers of securities and insurance products.
  • When a wholesaler becomes a fiduciary to a plan or an IRA, and the recommendation is made by the advisor or agent to and accepted by the IRA investor or plan fiduciary, there will likely be a prohibited transaction due to the wholesaler’s firm making money on the investment or insurance product.
  • Where a wholesaler prohibited transaction occurs, an exemption (PTE) will be needed, most likely PTE 2020-02.

When a person makes a “covered” fiduciary recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm or an affiliate) receiving additional compensation, a prohibited transaction (under the Code and/or ERISA) will occur.

The proposed regulation defines a “retirement investor” as a: …plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary (retirement investor). (The emphasis is mine.)

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The New Fiduciary Rule (21): Requirement to Correct Failures with PTE Conditions (Part 3)

The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • The expansive definition of fiduciary in the DOL’s proposed regulation will cause many more advisors and insurance agents to be fiduciaries for their recommendations to retirement investors. Where the recommendations result in additional compensation for them or their firms, that compensation will be prohibited. That would be the case where, for example, a rollover recommendation results in fees or commissions from the rollover IRA.
  • Where a prohibited transaction occurs, an exemption (PTE) will be needed, e.g., PTEs 84-24 or 2020-02, in order for the advisor or agent to receive any compensation, e.g., from the rollover IRA or annuity.
  • One of the conditions for obtaining the protection of either of those PTEs is an annual retrospective review and report on compliance with the requirements of the exemptions. If a failure is found to satisfy the conditions in the exemption, for example, in the review, it must be corrected.

When a person makes a “covered” recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm or an affiliate) receiving additional compensation, a prohibited transaction (under the Code and/or ERISA) will occur.

A “covered” recommendation is one in which the person is a fiduciary (as defined in the proposed fiduciary recommendation) and the recommendation is about the investment of “qualified” or retirement accounts (as that is defined in the proposed regulation). Some of the covered investment recommendations include: Investing in securities, annuities or other property; rollovers; IRA transfers; withdrawals from retirement accounts; and investment strategies, policies and allocations.

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The New Fiduciary Rule (20): Requirement to Correct Failures with PTE Conditions (Part 2)

The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • The expansive definition of fiduciary in the DOL’s proposed regulation will cause many more advisors and insurance agents to be fiduciaries for their recommendations to retirement investors. Where the recommendations result in additional compensation for them or their firms, that compensation will be prohibited. That would be the case where, for example, a rollover recommendation results in fees or commissions from the rollover IRA.
  • Where a prohibited transaction occurs, an exemption (PTE) will be needed, e.g., PTEs 84-24 or 2020-02, in order for the advisor or agent to receive any compensation, e.g., from the rollover IRA or annuity.
  • One of the conditions for obtaining the protection of either of those PTEs is an annual retrospective review and report on compliance with the requirements of the exemptions. If a failure is found in the review, it must be corrected.

When a person makes a “covered” recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm or an affiliate) receiving additional compensation, a prohibited transaction (under the Code and/or ERISA) will occur.

A “covered” recommendation is one in which the person is a fiduciary (as defined in the proposed fiduciary recommendation) and the recommendation is about the investment of “qualified” or retirement accounts (as that is defined in the proposed regulation). Some of the covered investment recommendations include:  investing in securities, annuities or other property; rollovers; IRA transfers; withdrawals from retirement accounts; and investment strategies, policies and allocations.

The proposed regulation defines a “retirement investor” as a: …plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary (retirement investor).

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The New Fiduciary Rule (19): Requirement to Correct Failures with PTE Conditions (Part 1)

The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • The DOL’s proposed fiduciary regulation defines fiduciary recommendations to include, among other things, one-time advice where specified conditions are satisfied.
  • That expansive definition will cause many more advisors and insurance agents to be fiduciaries for their recommendations and, where the recommendations result in additional compensation for them or their firms, that compensation will be prohibited. That would be the case where, for example, a rollover recommendation results in fees or commissions from the rollover IRA.
  • Where a prohibited transaction occurs, the protection of an exemption (PTE) will be needed, e.g., PTEs 84-24 or 2020-02.
  • One of the conditions for obtaining the protection of either of those PTEs is an annual retrospective review and report on compliance with the requirements of the exemptions. If a failure is found in the review, it must be corrected or the benefit provided by the exemptions will be lost.

When a person makes a “covered” recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm or an affiliate) receiving additional compensation, a prohibited transaction (under the Code and/or ERISA) will occur.

A “covered” recommendation is one in which the person is a fiduciary (as defined in the proposed fiduciary recommendation) and which falls into one of the three defined categories in the proposed regulation. Those categories include, for example, recommendations about investing in securities or annuities, rollovers, IRA transfers, withdrawals from retirement accounts, and investment strategies, policies and allocations.

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ERISA Moments Ep. 17: The DOL Fiduciary Proposal’s Impact on Banks and Trust Departments

Take a quick dive into the exciting world of ERISA with Faegre Drinker benefits and executive compensation attorneys Fred Reish and Brad Campbell. In this quick-hit series of updates, Fred and Brad offer a high-level view of current trends and recent ERISA developments.

See the newest episode, DOL Fiduciary Hearings and Comment Letters: Part 2, on the Spotlight on Benefits blog.

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The New Fiduciary Rule (18): Requirement to File Form 5330 and Pay Excise Taxes

The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • The DOL’s proposed fiduciary regulation defines fiduciary recommendations to include, among other things, one-time advice where specified conditions are satisfied.
  • That expansive definition will cause many more advisors and insurance agents to be fiduciaries for their recommendations and, where the recommendations result in additional compensation for them or their firms, the implementation of the recommendations will result in prohibited transactions. That would be the case where, for example, a rollover recommendation results in fees or commissions from the rollover IRA.
  • Where a prohibited transaction occurs, the protection of an exemption (PTE) will be needed, e.g., PTEs 84-24 or 2020-02.
  • The proposed amendments those PTEs include a requirement that, if a failure to satisfy the conditions of the exemptions is found in the annual review of covered transactions, the failure must be corrected and reported to the DOL and, if those steps are not timely taken, a Form 5330 must be filed with the IRS and excise taxes on prohibited transactions must be paid.

When a person makes a “covered” recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm) receiving additional compensation, a prohibited transaction (under the Code and ERISA) will occur.

A “covered” recommendation is one in which the person is a fiduciary (as defined in the proposed fiduciary recommendation) and which falls into one of the three defined categories. Those categories include, for example, recommendations about investing in securities or annuities, rollovers, IRA transfers, withdrawals from retirement accounts, and investment strategies, policies and allocations.

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