DOL Reverts to 5-Part Fiduciary Status Test

The Department of Labor will revert to its previous five-part test for determining fiduciary status following final judgments this month in two district courts vacating the contested Biden-era fiduciary rule from the previous presidential administration.

The decision to return to previous guidance is the next stage of tit-for-tat over the rule, which has continued to change with each new administration.

Under the five-part test, people are investment advice fiduciaries under the Employee Retirement Income Security Act if they regularly provide individualized investment advice or recommendations to a retirement investor, under a mutual agreement, that serve as a primary basis for investment decisions.

According to a release from the DOL’s Employee Benefits Security Administration, the department is not conducting a comment period, nor offering a formal notice, regarding the rule. However, the department noted that it will consider whether any additional guidance is necessary.

The rule proposed under former President Joe Biden and vacated after President Donald Trump’s DOL declined to defend it in court, would have set a new fiduciary standard that expanded fiduciary obligations under ERISA to include professionals providing one-time professional retirement investment advice.

“The challenged regulation wrongly sought to impose ERISA fiduciary status on securities brokers and insurance agents when there was not a relationship of trust and confidence,” said DOL Assistant Secretary and head of EBSA Head Daniel Aronowitz. “The Securities and Exchange Commission and state regulators regulate the activities of securities brokers and insurance agents and will continue to do so.”

According to David Kaleda, a partner in Eversheds Sutherland’s employee benefits practice, the DOL “went through great pains to explain why notice and comment was not needed,” likely an attempt to get in front of any challenges or simply to clear a path for future rulemaking.

As for what changes, Kaleda says, “financial institutions are likely to reevaluate their fiduciary status, particularly with regard to rollover recommendations, and whether [Prohibited Transaction Exemption 2020-02] compliance in that regard is necessary.” But he says “it is too early to tell whether firms will get comfortable that no rollover recommendations are investment advice.”

PTE 2020-02 is the 2021 DOL regulation from the DOL that allows investment advice fiduciaries to receive compensation for transactions otherwise prohibited, including rollovers from defined contribution retirement plans to individual retirement accounts. It requires fiduciaries to act in the best interest of retirement investors, minimize conflicts of interest, and charge reasonable compensation.

Lisa Gomez, who serve as EBSA head under Biden, criticized the latest DOL decision in a LinkedIn post.

“The five-part test is a decades-old framework designed for a very different marketplace than the one retirement savers experience today,” she wrote. “Before the rise of rollovers in a retirement saver’s decision making process, before the increase in complicated advice models and complex investment products, and before millions of Americans were asked to navigate retirement largely on their own.”