The Department of Labor’s (DOL) final regulation defining fiduciary status for investment advice to retirement investors is effective on September 23, 2024. The related exemptions—PTE 2020-02 and 84-24—are partially effective on the same date. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including transfer and exchange recommendations).

However, the relief provided by the PTEs is not needed unless a conflicted fiduciary recommendation is made. In the preamble to the fiduciary regulation, the DOL described a recommendation as follows:

Whether a person has made a ‘‘recommendation’’ is a threshold element in establishing the existence of fiduciary investment advice. For purposes of the final rule, whether a recommendation has been made will turn on the facts and circumstances of the particular situation, including whether the communication reasonably could be viewed as a ‘‘call to action.

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The Department intends that whether a recommendation has been made will be construed in a manner consistent with the SEC’s framework in Regulation Best Interest.

But not every conversation with retirement investors is a recommendation. There are three notable exceptions, two of which are discussed in the preamble to the regulation: education and “hire me.” This article discusses the “hire me” exception. There will be a future article on education.

In the preamble to the fiduciary regulation, the DOL discusses hire me as follows:

An investment advice provider can recommend that a retirement investor enter into an advisory relationship with the provider without acting as a fiduciary.

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In the final rule, the Department has taken the same approach as it took in the proposal regarding ‘‘hire me’’ communications. Persons can tout their own services and provide other information (including information about their affiliates’ services)….

However, the DOL goes on to admonish that there is a limit. “Hire me” only covers touting one’s services; it does not cover any recommendations of others or of products that may come up in hire me conversations:

There is a line between an investment advice provider making claims as to the value of its own advisory or investment management services in marketing materials, on the one hand, and making recommendations to retirement investors on how to invest or manage their savings, on the other. An investment advice provider can recommend that a retirement investor enter into an advisory relationship with the provider without acting as a fiduciary. But when the investment advice provider recommends, for example, that the investor pull money out of a plan or invest in a particular fund, that advice may be given in a fiduciary capacity even if part of a presentation in which the provider is also recommending that the person enter into an advisory relationship. (Emphasis added by me.)

The explanation continues:

The Department also said in the proposal’s preamble that it believed that this is consistent with the functional fiduciary test laid out in the statute in which an entity is an investment advice fiduciary to the extent that they satisfy the definition. It does not follow from the fact that one piece of advice is not fiduciary investment advice (here, the ‘‘hire me’’ recommendation) that the rest of the advice is necessarily excluded from the definition (here, the advice to pull money out of the plan and invest in a particular fund). The investment advice fiduciary could not recommend that a plan participant roll money out of a plan into investments that generate a fee for the fiduciary but make an imprudent recommendation that leaves the participant in a worse position than if the participant had left the money in the plan. Thus, when a recommendation to ‘‘hire me’’ effectively includes a recommendation on how to invest or manage plan or IRA assets (e.g., whether to roll assets into an IRA or plan or how to invest assets if rolled over), that recommendation would need to be evaluated separately under the provisions in the proposed regulation. (Emphasis added by me.)

However, that does not mean that the hire me approach isn’t valuable. The obvious example is where a level-fee adviser “recommends” that the adviser be hired by a 401(k) plan to provide advice on selecting and monitoring the plan’s investment lineup. That can be done through a hire me approach and, as a result, the fee earned for the investment advice would not be a fiduciary prohibited transaction. (Of course any investment provided once hired would be fiduciary advice.)

Then, assume that, after being hired as the plan’s adviser, the adviser says to the plan fiduciaries that they should “hire me” to provide investment management services to participants. If properly done, that should not be a fiduciary recommendation. The key is not stepping over the line and making an explicit or implicit investment recommendation. Of course, the actual management services for participant accounts would be a fiduciary activity. Discretion over plan assets is per se a fiduciary activity.

Concluding Thoughts

The “hire me” exception will be helpful to advisers to plans, participants and IRA owners. If properly done, it allows advisers to be engaged without a prohibited transaction (and the need to satisfy the conditions in PTE 2020-02). However, there is a line; if an adviser steps over the line, it will result in a fiduciary recommendation and possibly a prohibited transaction.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.