The U.S. Department of Labor ’s Employee Benefits Security Administration has proposed a retirement security rule updating the definition of an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). Currently, ERISA imposes the "best interest of employees" standard on advisers when they give advice about 401(k) accounts.  The proposal would extend this higher standard to financial advisers, brokers and insurance agents giving advice about rollover Individual Retirement Accounts (IRAs).

The proposal would govern advice affecting trillions of dollars in retirement accounts, The Wall Street Journal reported.

Currently, ERISA provides that employers have a duty to manage 401(k) plans in the best interest of employees, and imposes this fiduciary standard on advisers to act in a client’s best interest when giving advice about 401(k)s. The fiduciary standard has not extended to IRAs or to rollovers. 

“The updated definition of an investment advice fiduciary would apply when financial services providers give investment advice for a fee to retirement plan participants, individual retirement account owners and others,” the Department of Labor (DOL) announcement states. “The current definition, adopted in 1975, was written at a time when IRAs were less common and 401(k) plans did not exist, so most Americans relied on traditional defined benefit pensions retirement savings. In today’s marketplace, individual plan participants and IRA owners—rather than professional money manages—are expected to make important, complex financial decisions and seek the help of expert advisers, making the proposed rulemaking necessary.”

Proponents of the rule change argue that it will reduce the odds of retirement savers ending up in expensive investments that will leave them with less money in retirement, the Journal reported, while opponents said it will result in a bigger regulatory burden for advisory firms and could reduce the number of advisers willing to work with investors, especially those with smaller accounts.

The rule will increase retirement savers’ returns by between 0.2 percent and 1.2 percent a year, potentially boosting retirement savings by up to 20 percent over a lifetime, according to the White House, as reported by the Journal.

“People haven’t been educated on how to manage their money and withdraw it for a retirement that could last up to 30 years,” Fred Reish, an attorney who specializes in employee benefits, told the Journal. “The Labor Department is worried about people’s life savings leaving the 401(k) world, where fiduciary rules apply, to go into IRAs, where prices can be higher and investors may not have the sophistication to identify advisers’ conflicts of interest.”

Under ERISA, commissions are normally barred because they might provide incentives for advisers to favor one investment over another to get a higher paycheck, Reish told the Journal. He predicted that advisers will offer consumers more services to justify the higher fees many pay with IRAs, compared to 401(k)s, which often feature bargain-priced institutional investments.

The proposed rule would revise a five-part test that the DOL issued in 1975 to determine who is a fiduciary and must act in a client’s best interest, according to administration officials quoted by the Journal.

One part of the test currently allows advisers and financial-services companies to avoid fiduciary status by making a one-time recommendation, such as to roll over a 401(k) account to an IRA. Under the proposed regulation, the DOL is amending the five-part test to ensure that those advisers recommending rollovers are treated as fiduciaries, administration officials told the Journal.  

To understand the impact that fees have on retirement plans and management's responsibilities when accessing fees in a retirement plan, including ERISA fiduciary standards regarding fees in a retirement plan, attend the Foundation for Accounting Education's Navigating a Fee Focused Environment Tech Session Webinar on Nov. 16.