Key Takeaways
- The DOL’s final regulation defining non-discretionary fiduciary advice will be effective on September 23 of this year.
- If a conflicted fiduciary recommendation is made, the requirements (called “conditions”) of PTEs 2020-02 and 84-24 will need to be satisfied in order to retain any compensation resulting from the recommendation.
- However, absent a fiduciary recommendation, the relief afforded by the exemptions will not be needed.
- There are three ways to engage with retirement investors without making a recommendation. Those are: “hire me”, education and unsolicited. This article discusses the educational approach.
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 communication 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.”
“Hire me” was discussed in my last post Fiduciary Rule 34.This article discusses the DOL’s position on investment and retirement education.
As background, the DOL has long held that investment education, if properly done, is not a recommendation and therefore does not cause the provider to be a fiduciary. The “bible” in terms of DOL guidance is Interpretive Bulletin (IB) 96-1.
In the preamble to the new final rule, the DOL definitively said:
- Similarly, the rule makes clear that mere investment information or education, without an investment recommendation, is not treated as fiduciary advice.
- The Department agrees that it is important that retirement investors continue to have access to information about the options available to them regarding rolling over, transferring or distributing retirement assets and that these discussions can be purely educational.
- Paragraph (c)(1)(iii) also makes clear that the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of the final rule.
That was further confirmed in the regulation itself:
- Similarly, the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of this rule.
However, it is not enough to just label a communication as education. As you might imagine, the information must be truly educational. My belief is that one test is whether the information is materially complete and unbiased. But let’s see what the DOL said in the preamble:
In general, for purposes of the final rule, the line between an investment recommendation and investment education or information will depend on whether there is a call to action. Thus, many of the types of information cited by commenters as important to retirement investors could be provided under the final rule without the imposition of fiduciary status. For example, like the SEC in Regulation Best Interest, the Department believes that ‘‘a general conversation about retirement planning, such as providing a company’s retirement plan options’’ to a retirement investor, would not rise to the level of a recommendation.
The preamble continues:
In this regard, the Department confirms that providing educational information and materials such as those described in IB 96–1 will not result in the provision of fiduciary investment advice as defined in the final rule absent a recommendation, regardless of the type of retirement investor to whom it is provided. Information on the benefits of plan participation and on the terms or operation of the plan, as described in the first category of investment education in the IB, clearly could include information relating to plan distributions and distribution options. Additionally, an analysis of the plan information category of investment education applied in the context of IRAs would allow such a plan sponsor or service provider to also provide a wide range non-fiduciary information about IRAs, such as tax benefits associated with rollovers into IRAs.
So, investment and retirement plan information and education will also work, if properly done, for IRA investing and planning and for rollover education.
The preamble goes on to say:
Likewise, the Department confirms that furnishing the categories of investment-related information and materials described in the ‘‘Investment Education’’ provision in the 2016 Final Rule would not result in the provision of fiduciary investment advice under the final rule. The provision in the 2016 Final Rule included, for example, information on ‘‘[g]eneral methods and strategies for managing assets in retirement (e.g., systemic withdrawal payments, annuitization, guaranteed minimum withdrawal benefits).’’
Keep in mind that the DOL is talking about education which, by definition, is somewhat generic and not individualized. The more individualized the communication, the greater the risk that it could be a recommendation subject to the fiduciary and prohibited transaction rules.
The DOL admonishes:
The Department emphasizes that the inquiry in this respect will focus on whether there is a call to action. Thus, the Department cautions providers against steering retirement investors towards certain courses of action under the guise of education. The SEC similarly stated in Regulation Best Interest that while certain descriptive information about employer sponsored plans would be treated as education, rather than as a recommendation, broker-dealers should ‘‘ensure that communications by their associated persons intended as ‘education’ do not cross the line into ‘recommendations.’ ”
As I said earlier, a key to knowing where the line is between education and recommendation is the individualization of the information. The more individualized the communication, the more likely it is a recommendation.
Concluding Thoughts
Yes, “education” still works as an alternative to a fiduciary recommendation. But it must be neutral education and information.
As FINRA pointed out in Regulatory Notice 13-45 (and I believe that the DOL would concur):
Some firms and their associated persons provide educational information to plan participants concerning their retirement choices. Firms that permit educational information only should adopt measures reasonably designed to ensure that the firm and its associated persons do not make recommendations for purposes of Rule 2111 to plan participants. These measures should include training concerning what statements may trigger application of Rule 2111, and consideration of the compensation arrangements that could cause an associated person to make a recommendation. To the extent that a firm prohibits recommendations to plan participants, supervisory personnel of the firm should reasonably monitor the communications to ensure that the prohibition is not compromised.
To avoid the potential of “education” becoming recommendations, firms should have training and supervision (and hopefully supporting documentation) for the education that they will be delivering.
