On April 23, 2024, the Department of Labor (DOL) announced significant updates to the fiduciary rule. With its initial introduction stirring a mix of anticipation and apprehension among financial professionals, this rule—formally known as the retirement security rule—underwent revisions to better protect retirement savings and ensure that advisors act in their clients' best interests. For retirement plan sponsors, understanding the nuances of this rule is critical in navigating the world of fiduciary responsibilities.
What is the final fiduciary rule?
The recent regulatory update by the DOL aims to improve how financial advisors serve their clients' needs by refining the criteria for identifying fiduciaries and addressing conflicts of interest. This is in line with the longstanding objective of ensuring that financial advisors offer advice closely aligned with their clients' best interests. Under the new rule, financial advisors will have to:
Meet a professional standard of care when making recommendations (give prudent advice)
Never put their financial interests ahead of the retirement investor's when making recommendations (give loyal advice)
Avoid misleading statements about conflicts of interest, fees, and investments
Charge no more than what is reasonable for their services
Give the retirement investor basic information about the adviser's conflicts of interest.
Additionally, the final rule provides that a financial services provider will be an investment advice fiduciary under federal pension law if:
The financial professional makes an investment recommendation to a retirement investor
The recommendation is provided for a fee or other compensation, such as commissions
The financial professional holds itself out as a trusted adviser by:
specifically stating that it is acting as a fiduciary under Title I or II of ERISA; or
making the recommendation in a way that would indicate to a reasonable investor that it is acting as a trusted adviser making individualized recommendations based on the investor’s best interest.
One-time advice
The rule addresses the exemption for singular advice instances. Specifically, a provider of financial services will assume the role of a fiduciary when suggesting the transfer of funds from an employer-sponsored retirement plan to an Individual Retirement Account (IRA), provided all criteria within the definition of a fiduciary are met.
Education vs. advice
A notable distinction under the new rule is the differentiation between education and advice. Offering general financial and investment education to plan participants does not constitute fiduciary advice as long as it does not steer participants toward specific investment decisions. This clarification allows plan sponsors to continue providing valuable educational resources without assuming fiduciary liability for investment decisions made by participants.
What does it mean for plan sponsors?
For retirement plan sponsors, the updated fiduciary rule underscores the importance of diligence in the selection and monitoring of plan advisors. Plan sponsors should ensure that their advisors adhere to the highest standards of fiduciary responsibility, offering unbiased advice that serves the best interests of the participants. This includes a deeper examination of investment options, fee structures, and the overall impact of the advice on plan participants' retirement readiness.
We serve as a fiduciary advisor because we want to do right by our clients and believe it is the right thing to do. No matter how rules change over the years, we will continue to act in the best interests of our clients.
What should plan sponsors do following up this ruling?
In light of the updated fiduciary rule, plan sponsors should take proactive steps to review their retirement plans thoroughly. This includes:
Re-evaluating relationships with financial advisors to ensure compliance with the new fiduciary standards.
Auditing the plan’s investment lineup to assure it meets the impartial conduct standards.
Enhancing participant education programs to clearly differentiate between education and advice.
Documenting all processes and decisions related to plan management to demonstrate prudence and diligence in fiduciary responsibilities.
The rule and amendments to the prohibited transaction exemptions (PTEs) generally take effect on September 23, 2024, although there is a one-year transition period after the effective date for certain conditions in the PTEs.
The Department of Labor's fiduciary rule update marks a significant milestone in ensuring the interests of retirement plan participants are protected. By understanding and adapting to these changes, plan sponsors can not only comply with legal requirements but also enhance the value and effectiveness of their retirement plans, contributing significantly to the financial well-being of their participants. Contact our team today if you have any questions.
About Your Local Colorado Retirement Advisors
At 401k Extra, we are passionate about providing solutions that:
— Help sponsors measurably improve their retirement plan success.
— Improve participant outcomes and retirement readiness.
— Help families achieve their financial and retirement goals efficiently and timely.
As 401k specialists, we can help you measure the health of your retirement plan and uncover potential opportunities. Get your free 401k analysis today.
401K EXTRA | RETIRE YOUR WAY
Fran Gillis AIF®, QPFC, PPC, CFWP
Lucas Gillis AIF®, CPFA, CFWP
970-225-2001
Fran Gillis and Lucas Gillis are Investment Advisor Representatives of Dynamic Wealth Advisors dba 401k Extra LLC. All advisory services offered through Dynamic Wealth Advisors.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.
©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.