What to expect while you’re expecting the fiduciary rule

It will be months before the Department of Labor publishes the final version of its fiduciary rule, but one thing advisors and their firms should expect is that it will be effective for some time.  

It will almost certainly face legal challenges, but the DOL has never been in such a strong position to defend against those – it’s had years of practice, and it built the new rule with the benefit of hindsight, lawyers say. Even if the presidency changes parties in 2025, a new administration opposed to the rule would have its work cut out for it.  

The proposed rule “was carefully architected to try to be litigation-proof,” said Jason Roberts, CEO of the Pension Resource Institute. The preamble of the rule made clear that the DOL effectively reverse-engineered the defeat of the Obama-era fiduciary rule, which the 5th Circuit Court of Appeals shot down in 2018, he noted.  

“The DOL worked diligently to craft something that was prepared for challenges – or at least they specifically called that out throughout the preamble to the proposal,” Bonnie Treichel, chief solutions officer at Endeavor Retirement, said in an email. “And, not extending the comment period was an effort to allow for enough time to receive, review comments, and still get out a final rule and implement ahead of a timeline with a potential change in administration at the beginning of 2025.”  

Although the older version of the rule resembles the proposed one, it’s notable that the 2018 court defeat was barely secured, Roberts said.  

“There were numerous court challenges through that process, and the DOL won every single one of them, until it didn’t. It even won [in] the underlying 5th Circuit,” he said.   

The appellate decision was 2–1 against the DOL, which the court found had exceeded the rulemaking authority granted to it by Congress.   

“There was a long period of time where the rule was in place,” Roberts said. “Even if somebody is hoping for a similar [court] result … it’s risky from a financial and compliance penalty perspective as well as from a reputational perspective to not comply with a rule that is on the books.”  

Whatever the industry gets in the final version of the rule to be published this spring is what it gets. And if the widespread opposition to the proposed rule is any indication, the financial services industry largely won’t like it.  

Broker-dealers, registered investment advisors, and insurance companies have been digesting the myriad facets of the rule to prepare themselves to quickly update their policies and procedures and client-facing disclosures after the final version is published, Roberts noted. Advisors will have to follow their firms’ compliance guidelines, and preparing to do so will be a theme this year.  

After being published in late spring, the rule will likely have a 60-day effective date, although firms will likely have 90 to 180 days to comply with some parts of it, he said.  

WHAT TO WATCH FOR  

A premise of the rule is that retirement account holders, including those rolling over their funds into an individual retirement account, should receive conflict-free advice that’s in their best interest. The financial services industry has mostly contended that the rule would have the opposite effect for people with modest savings levels who don’t have the means to pay asset-based fees or flat fees and have received advice from brokers paid through commissions on the products they sell. Currently, consumers are protected by the Securities and Exchange Commission’s Regulation Best Interest and various state insurance regulations, opponents of the DOL’s rule have said.  

Fiduciary advocates have strongly disputed that. Political support for the rule is also divided by party lines.  

Those likely to be most affected by the rule are independent insurance agents, who, for the first time, could be subject to the Employee Retirement Income Security Act if they recommend annuities for retirement account assets.  

“If you’re the independent producer, there is no firm standing behind you,” Roberts said. “The buck stops with them, whereas if you’re with the firm, you follow whatever the firm requires.”  

Independent agents will thus be looking to the carriers, independent marketing organizations, and, in some cases, broker-dealers they work with for help with complying, he said.  

It’s not known whether the DOL will walk back much, if anything, in the final version of the rule, and it might be risky to assume that it will. But the agency will likely clarify some aspects of the rule that commentors pointed to.  

PTE 20-02  

Roberts and Treichel both pointed to proposed amendments to Prohibited Transaction Exemption 20-02 that address incentives and differential compensation.  

“There is a list of things that would be disfavored, including appraisals, performance and personnel actions, bonuses, and differential compensation,” Treichel said. “This seems to require clean-up in the final or else would be squarely under attack as being too prescriptive.”  

The DOL could be alluding to the anti-conflict policies and procedures it made under the Best Interest Contract Exemption in the now-defunct 2016 version of its rule, Roberts said. At that time, the agency provided examples of policies that firms could use to prevent financial incentives causing agents to favor one product over another in the same category, he noted.   

“That’s going to be biggest lift for not only financial institutions but also product sponsors,” he said, adding that he hopes the DOL will clarify what it wants.  

Additionally, a provision that would require firms to provide clients with on-demand access to their books and records, for the sake of verifying that they comply with the prohibited transaction exemption, is an onerous one that Roberts said the DOL may walk back slightly. Such a requirement would increase staffing costs and invite litigation, he noted.  

OTHER AREAS  

One interpretation of language in the DOL’s proposed rule is that it would categorize conversations between plan participants and human resources professionals as investment advice, even when there’s no compensation associated with that, Treichel said. The DOL could clarify that interpretation in the final version, she said.  

Additionally, there have been questions about what has become known as the “hire me doctrine,” which the DOL may also clarify and define versus simpler investment education, Roberts said. The issue is whether advisors are pulled into fiduciary status when hired if their “hire me” pitches to retirement investor prospects include individualized investment strategies.  

BIGGER ISSUES  

A “sleeper issue” with PTE 20-02 is that the DOL is set to require firms to produce their policies and procedures, if asked, within 10 days. The agency could use that tactic to quickly gauge how seriously firms take the regulation, and if they don’t have the documents at all, it would be an invitation for a full investigation, Roberts noted. That is the strategy the DOL has used in reviewing the annual Form 5500 filings made by retirement plan sponsors. In that case, the agency has reviewed 5500 filings of the largest retirement plan sponsors, and it could similarly seek documents from big broker-dealers, he said.  

Another aspect that could be a big headache for broker-dealers involves documentation of commissions from IRA recommendations that required an exemption. In the past, a lack of documentation found during a DOL investigation was referred to the IRS, which imposed excise taxes, Roberts said. But under the proposed rule, firms that identify such errors outside of a DOL investigation would be required to contact the IRS and pay, he said.  

“It serves to enforce violations that it wasn’t actively auditing,” he said. “You’ve got to automatically pay IRS when you find a violation. That’s a big deal.”