The U.S. Department of Labor's Employee Benefits Security Administration has finalized its Retirement Security Rule to better protect retirement investors.
The Department has made several important changes and clarifications to the proposed rule and its related exemption amendments based on comments, petitions, and a 2-day public hearing. The final rulemaking package is narrower than the proposal and establishes a uniform standard for all retirement advice received from trusted advice providers.
The core purpose of the final rule remains the same – financial professionals who provide investment recommendations to retirement investors must act in the best interest of the retirement investor, not in the financial professional's own interest.
Changes to the rule
Definition of a "recommendation"
The final rule confirms that the determination of whether an investment recommendation has occurred will be made consistent with the Securities and Exchange Commission's approach in its Regulation Best Interest.
Discretionary authority
The final rule removes a proposed paragraph that would automatically treat recommendations from persons who have "discretionary authority or control" over a retirement investor's securities or other investment property as fiduciary investment advice. Whether or not such a person is considered a "fiduciary" will rely upon the general fiduciary provisions of the Employee Retirement Income Security Act (ERISA).
Facts and circumstances
The facts and circumstances paragraph includes several language changes to clarify that the standard is an objective standard based on a reasonable investor in like circumstances.
| Final rule | Proposed rule |
|---|---|
| The person either directly or indirectly (e.g., through or together with an affiliate) makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation is based on review of the retirement investor's particular needs or individual circumstances, reflects the application of professional or expert judgment to the retirement investor's particular needs or individual circumstances, and may be relied upon by the retirement investor as intended to advance the retirement investor's best interest; | The person either directly or indirectly (e.g., through or together with an affiliate) makes investment recommendations to investors on a regular basis as part of their business and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor's best interest; |
Fiduciary acknowledgement
Under the final rule, we clarified that a person is a fiduciary if they acknowledge they are a fiduciary under Title I or II of ERISA with respect to the recommendation at issue, rather than all investment recommendations. This is narrower than the proposal.
| Final rule | Proposed rule |
|---|---|
| The person represents or acknowledges that they are acting as a fiduciary under Title I of ERISA, Title II of ERISA, or both, with respect to the recommendation. | The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations. |
Sales pitches and investment education
The final rule adds a new paragraph to clarify and confirm how sales pitches can occur without requiring fiduciary status. Sales pitches that don't fall under the facts and circumstances or fiduciary acknowledgement paragraphs, such as "hire me" conversations, will not be treated as fiduciary advice as long as there is no investment recommendation.
The paragraph also clarifies that if there is no investment recommendation, then providing investment information and education does not constitute fiduciary advice.
| Final rule |
|---|
| A person does not provide investment advice if they make a recommendation but neither paragraph (c)(1)(i) nor (c)(1)(ii) is satisfied . . . . Similarly, the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of the rule. |
Definition of a retirement investor
The final rule adds a new paragraph to define a retirement investor. It excludes investment advice fiduciaries as retirement investors, meaning financial services intermediaries are generally excluded.
| Final rule |
|---|
| The term "retirement investor" means a plan, plan participant or beneficiary, IRA, IRA owner or beneficiary, plan fiduciary within the meaning of ERISA section (3)(21)(A)(i) or (iii) and Code section 4975(e)(3)(A) or (C) with respect to the plan, or IRA fiduciary within the meaning of Code section 4975(e)(3)(A) or (C) with respect to the IRA. |
Changes to the PTE 2020-02 amendment
Covered transactions
The final amendment broadens the transactions that are covered under PTE 2020-02 to all transactions. The proposal had limited principal transaction relief to riskless principal transactions or covered principal transactions. This means that relief from ERISA's prohibited transaction rules is broadly available for all categories of investment recommendations.
| Final amendment | Proposed amendment |
|---|---|
| "(1) The receipt, directly or indirectly, of reasonable compensation; and (2) The purchase or sale of an investment product to or from a Retirement Investor, and the receipt of payment, including a mark-up or mark-down." | "(1) The receipt of reasonable compensation; and (2) The purchase or sale of an asset in a riskless principal transaction or a Covered Principal Transaction, and the receipt of a mark-up, mark-down, or other payment." |
Disclosures
The final amendment makes various changes to clarify PTE 2020-02's disclosure requirements.
It refines the required disclosures to further align with the SEC's Regulation Best Interest.
| Final amendment | Proposed amendment |
|---|---|
| "II(b)(3) All material facts relating to the scope and terms of the relationship with the Retirement Investor, including: (A) The material fees and costs that apply to the Retirement Investor's transactions, holdings, and accounts; and (B) The type and scope of services provided to the Retirement Investor, including any material limitations on the recommendations that may be made to them; and" | "II(b)(3) A written description of the services to be provided and the Financial Institution's and Investment Professional's material Conflicts of Interest that is accurate and not misleading in any material respect. This description will include a statement on whether the Retirement Investor will pay for such services, directly or indirectly, including through Third-Party Payments. If, for example, the Retirement Investor will pay through commissions or transaction-based payments, the written statement must clearly disclose that fact. This statement must be written in plain English, taking into consideration a Retirement Investor's level of financial experience;" |
It removes language regarding the investor's right to obtain additional information upon request.
| Final amendment | Proposed amendment |
|---|---|
| "II(b)(4) All material facts relating to Conflicts of Interest that are associated with the recommendation." | "II(b)(4) A written statement that the Retirement Investor has the right to obtain specific information regarding costs, fees, and compensation, described in dollar amounts, percentages, formulas, or other means reasonably designed to present full and fair disclosure that is materially accurate in scope, magnitude, and nature, with sufficient detail to permit the Retirement Investor to make an informed judgment about the costs of the transaction and about the significance and severity of the Conflicts of Interest, and that describes how the Retirement Investor can get the information, free of charge;" |
It also limits the rollover disclosure requirement to rollovers from Title I plans as opposed, for example, to rollovers from IRAs to IRAs.
| Final amendment | Proposed amendment |
|---|---|
| "II(b)(5) Rollover disclosure. Before engaging in or recommending that a Retirement Investor engage in a rollover from a Plan that is covered by Title I of ERISA, or making a recommendation to a Plan participant or beneficiary as to the post-rollover investment of assets currently held in a Plan that is covered by Title I of ERISA, the Financial Institution and Investment Professional must ..." | "II(b)(5) Rollover disclosure. Before engaging in a rollover, or making a recommendation to a Plan participant as to the post-rollover investment of assets currently held in a Plan, the Financial Institution and Investment Professional must ..." |
Self-correction
The requirement to notify the Department of a self-correction has been removed.
3(38) fiduciaries
The final amendment adds a new provision for certain investment managers to get relief under the exemption by complying with the impartial conduct standards, without having to meet the other disclosure and procedural requirements of the exemption.
| Final rule |
|---|
| "To the extent a Financial Institution or Investment Professional provides fiduciary investment advice to a Retirement Investor as part of its response to a request for proposal to provide investment management services under section 3(38) of ERISA, and is subsequently hired to act as investment manager to the Retirement Investor, it may receive compensation as a result of the advice under this exemption, provided that it complies with the Impartial Conduct Standards as set forth in Section II(a). This paragraph does not relieve the Investment Manager, however, from its obligation to refrain from engaging in any non-exempt prohibited transactions in the ongoing performance of its activities as an Investment Manager." |
Changes to the PTE 84-24 amendment
Reasonable compensation
The final amendment's Impartial Conduct Standards allow for any reasonable compensation, not just insurance sales commissions. The proposal limited compensation only to commissions.
| Final amendment | Proposed amendment |
|---|---|
| "VII(a)(2) The compensation received, directly or indirectly, by the Independent Producer does not exceed reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2); and" | "VII(a)(2) The Independent Producer receives no compensation in connection with the transaction other than the Insurance Sales Commission, and the Insurance Sales Commission does not exceed reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2); and" |
Definition of independent producer
The final amendment revises the definition of an independent producer to clarify that the exemption is available to statutory employees of an insurance company that has no financial interest in the covered transaction. The proposal would have limited the definition to exclude statutory employees entirely.
| Final amendment | Proposed amendment |
|---|---|
| "(d) 'Independent Producer' means a person or entity that is licensed under the laws of a State to sell, solicit or negotiate insurance contracts, including annuities, and that sells to Retirement Investors products of multiple unaffiliated insurance companies, and (1) is not an employee of an insurance company (including a statutory employee as defined under Code section 3121(d)(3)); or (2) is a statutory employee of an insurance company that has no financial interest in the covered transaction." | "(d) 'Independent Producer' means a person or entity that is licensed under the laws of a state to sell, solicit or negotiate insurance contracts, including annuities, and that sells to Retirement Investors products of multiple unaffiliated insurance companies but is not an employee of an insurance company (including a statutory employee under Code section 3121)." |
Disclosure
The disclosure requirements in the final amendment to PTE 84-24 were revised to match the provisions in the final amendment to PTE 2020-02. However, it also includes text based on the National Association of Insurance Commissioners' model regulation.
Certification 5330
While the proposal indicated that an insurer must certify that it has filed Form 5330, relating to excise taxes for prohibited transactions, the final amendment states that the insurer must certify that it received certification from the independent producer that they have filed the Form 5330.
| Final amendment | Proposed amendment |
|---|---|
| "VII(d)(4) The Senior Executive Officer must certify, annually, that: ... (B) The Insurer has provided Independent Producers with the information required under (d)(2) and has received a certification that the Independent Producer has filed Form 5330 within 30 days after the form is due (including extensions);" | "VII(d)(4) A Senior Executive Officer of the Insurer certifies, annually, that: ... (B) The Insurer has filed (or will file timely, including extensions) Form 5330 reporting any non-exempt prohibited transaction discovered by the Insurer in connection with investment advice covered under Code section 4975(e)(3)(B), advised the Independent Producer of the violation and any resulting excise taxes owed under Code section 4975, and notified the Department of Labor of the violation via email to PTE_84-24@dol.gov." |
Changes to both the PTE 2020-02 & PTE 84-24 amendments
Phase-in period
The final amendments provide for a 150-day phase-in period rather than the proposal's applicability date of 60 days for the core impartial conduct standards and the fiduciary acknowledgement provisions, which become effective on September 23, 2024. All other provisions will take effect a year after that applicability date, on September 23, 2025.
Recordkeeping
The 2023 proposals sought comment on whether or not to expand the recordkeeping provisions for PTEs 2020-02 and 84-24. After reviewing public feedback, the Department chose to keep the exemptions' original recordkeeping requirements.
Non-felony eligibility
The final amendments remove all of the proposal's references to a Department-issued ineligibility notice for engaging in certain types of egregious misconduct. Now, a financial institution or investment professional, including an independent producer, will become ineligible to rely on the exemption if a criminal or civil court finds that they have participated in the specified types of misconduct.
Unlike the proposal, the Department does not assert the authority to declare an investment professional or financial institution ineligible, absent a court determination or court-approved settlement determining that the parties engaged in the prohibited misconduct.
Changes to PTEs 75-1, 77-4, 80-83, 83-1, & 86-128
PTE 86-128 IRA exclusion
Under PTE 86-128, fiduciaries that exercise full discretionary authority or control with respect to IRAs are excluded from the requirement to comply with the exemption's conditions. The proposed amendment would have removed that exclusion, and these fiduciaries would have had to comply with the conditions for both IRAs and Title I plans.
After considering the comments received, the Department decided not to eliminate the exclusion, allowing these fiduciaries to continue to rely on PTE 86-128.
Revocation of 75-1 paragraphs
The Department chose not to implement its proposal to revoke certain paragraphs and parts of PTE 75-1.
Exemption availability
The final amendment clarifies that relief under these exemptions is not available for the receipt of compensation as the result of the provision of investment advice.
Read more about EBSA's Retirement Security Rule