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Final version of DOL rule makes IRA rollovers a fiduciary responsibility

On Behalf of | May 17, 2024 | Securities and Compliance

The Department of Labor’s new rule revising the definition of fiduciary advice makes it clear that advisers have a fiduciary responsibility when recommending IRA rollovers, according to an InvestmentNews report.

The rule, which takes effect on Sept. 23, updates 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

The rule states, “Financial Institutions must document the reasons for a rollover recommendation and provide that documentation to the Retirement Investor.” There must be a “written explanation of the basis to recommend a rollover.”

Industry experts are assessing the implications of the new rule for brokers, including insurance agents who utilize rollovers for the sale of annuities.

“The greatest impact will be on rollover recommendations, which will now almost always be fiduciary recommendations, where the advisor or agent will owe the participant a duty of care and a duty or loyalty, meaning that [they] will need to carefully and thoughtfully examine the alternatives available to the participant,” Fred Reish, partner at Faegre Drinker Biddle & Reath, said in an email to InvestmentNews.  He also noted the conflicts of interest that can arise in rollover transactions.  “When a rollover is recommended, there will be conflicts of interest because the advisor will make money from the rollover IRA, or the insurance agent will make money from the rollover annuity,” Reish said.

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 of Labor 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.”

The new rule, which will be fully phased in by April 2025, includes an amendment prohibiting transaction exemptions that allow brokers to receive commissions in connection with retirement account advice.

The first lawsuit was recently filed against the rule, as a coalition of groups that includes the Federation of Americans for Consumer Choice went to federal court.  The FACC, which represents independent insurance professionals, asserts that the department exceeded its authority granted by Congress in approving the rule and goes against precedent set by the Court of Appeals for the Fifth Circuit, which vacated the previous fiduciary rule put forth by the Obama administration in 2018.  Insurance industry groups contend that investors have sufficient protection from the SEC’s Regulation Best Interest and insurance laws at the state level.

After that rule was struck down, the DOL developed a new version of the rule in hopes of defeating legal challenges.

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