Will the new DOL fiduciary rule be a trick or a treat?

October 31, 2023
2 minutes

The DOL's new fiduciary rule hasn't been released to the public yet, but we have learned some information from the White House.  

First, we know that the rule is targeting so called “junk fees” which seem to include commissions paid by retirement accounts.  This suggests that the rule may push the advice industry away from commission models to fee-based models like the Obama administration rule did.  This could pose real challenges (and costs) for firms that have already had to pivot from commissions to fees and back to commissions in the last several years.  This would also suggest less freedom for retirement savers than under the current state, where commission-based models are permitted as long as they comply with best interest requirements.

The rule will also target rollover advice.  This is not surprising because rollovers have been a major focus in the DOL's prior rule and in guidance issued under the current exemptive regime.  However, this also raises the risk that the DOL may be viewed by a court as exceeding its authority, potentially tempting the same fate that met the Obama administration's rule.  The exact scope and language of the new rule will be very important on this point, as the DOL must try to thread the needle by including rollovers without importing ERISA standards to IRAs which are not subject to those rules by statute.

We also know that, like the Obama administration's rule, the new rule will expressly include annuity and insurance products within its scope.  The rules appears set to specifically target fixed indexed annuities, which is interesting because those were only included in the final version of the Obama administration's rule, so the industry did not have time to fully comment on what standards should apply to recommendations for those products, unlike variable annuities and other annuities that were already subject to extensive comments. 

The White House described this as closing a loophole on non-security investment products, but it isn't clear that any loophole really exists since, as Ignites reports, “40 states have adopted an updated National Association of Insurance Commissioners model regulation that likewise applies the best interest standard to the insurance industry.”

Finally, we have learned that the DOL is going to address advice to 401(k) fiduciaries on investment menu design.  This advice is already generally fiduciary under ERISA, so it is unclear what the DOL is trying to capture.  

We will continue to follow developments on the DOL's new rule, so check this space (and our other publications) for the latest on the DOL's third iteration of its controversial rulemaking project.

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