The U.S. Department of Labor has finalized a retirement security rule that updates the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and Internal Revenue Code. The updated definition will go into effect on September 23, with other prohibited transaction exemptions expected to follow within a year.
The purpose of this change is to protect workers from overcharges and ensure that investment advice is provided in a manner that is prudent, loyal, and honest. The rule requires advice providers to avoid recommendations that serve their own interests and mandates financial institutions overseeing advice providers to manage conflicts of interest effectively.
Acting Secretary Julie Su emphasized that the rule aims to safeguard retirement investors from improper investment recommendations and harmful conflicts of interest. By establishing standards that prioritize the best interests of retirement investors, individuals can trust that their investment advice providers are acting in their favor and making unbiased decisions.
The rule defines an investment advice fiduciary as a financial services provider who provides paid investment advice to retirement plan participants, retirement account owners, and those involved in plan administration and asset management.
This update replaces the definition of investment advice fiduciary established in 1975, which was created before the prevalence of 401(k) plans and the increased complexity of retirement planning decisions. Assistant Secretary for Employee Benefits Security highlighted the importance of modernizing regulations to address the evolving investment and retirement landscape, ensuring that workers can secure a dignified retirement.
The Council of Economic Advisers estimates that conflicted advice costs individuals up to $5 billion per year, particularly concerning fixed index annuities.