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Department of Labor finalizes rule updating definition of investment advice fiduciary

On Behalf of | Apr 25, 2024 | Financial News

The U.S. Department of Labor announced that it has finalized its new fiduciary rule aimed at protecting retirement investors who rely on advice from financial professionals, AdvisorHub reports.

The rule, which takes effect on Sept. 23, would update the definition of an investment advice fiduciary under the Employee Retirement Income Security Act and the Internal Revenue Code.  It would apply when financial services providers give investment advice for a fee to retirement plan participants, individual retirement account owners and plan officials responsible for administering plans and managing their assets. .  These fiduciaries will have to adhere to high standards of care and loyalty when they recommend investments and avoid recommendations that favor the investment advice providers’ interests at the retirement savers’ expense

Under the final rule and amended exemptions, financial institutions overseeing investment advice providers must have policies and procedures to manage conflicts of interest and ensure providers follow these guidelines.

“America’s workers and their families rely on investment professionals for guidance as they save for retirement,” said Acting Secretary Julie Su. “This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions.”

Supporters and opponents weighed in on the plan during a 60-day period for public comments along with a two-day public hearing. The plan has drawn strong opposition from the financial industry, which says it would increase advisors’ regulatory costs and legal exposure, making their advice more expensive and hurting investors.  The White House Office of Management and Budget completed its review of the rule last week.

The DOL noted that the current definition of investment advice fiduciary, 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. The update become necessary under the current circumstances, in which individual plan participants and IRA owners rather than professional money managers are expected to make important decisions about their retirement plans and seek help from expert advisers.

“These new rules update regulations created nearly a half-century ago that simply are not providing the protections America’s workers need and deserve for their retirement savings so that they can retire with dignity,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez. “The investment landscape has changed, the retirement landscape has changed, and it is critical that our regulations are responsive to those changes so that workers can reach the secure retirement that they work for decades to finally achieve.”

The Financial Services Institute, a trade group of independent broker-dealers, expressed concern over what it called the abnormally rapid pace at which the rule was issued.  “We remain concerned that the final rule will have a negative impact on Main Street Americans’ access to financial advice as they attempt [to] save for a dignified retirement,” FSI said in a statement.

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