What's the impact of DOL’s new fiduciary rule? A Q&A with Colonial Surety's Richard Clarke

Plan sponsors and benefits advisors could face heightened scrutiny under the Department of Labor’s proposed fiduciary rule update. The proposal would modify language in the Employee Retirement Income Security Act of 1974 that determines when a person who is responsible for investing assets of an employee benefit plan or individual retirement account is considered a fiduciary. If enacted, the rule could impact employers when they roll over qualified employer plan assets into an IRA on behalf of an employee.

The agency has scheduled a virtual public hearing on the matter Dec. 12 and comments are due in less than a month.

The Biden Administration announced the Retirement Security Rule Oct. 31, saying it would reduce junk fees and increase competition in the retirement investment advice space.

“When advisors make recommendations to plan sponsors, including small employers, about which investments to include in 401(k) and other employer-sponsored plans, that advice is not subject to the SEC’s Regulation Best Interest and right now is not required to be in the customer’s best interest,” the White House said. “Since most Americans primarily save for retirement through their employers, making sure the investments available to them are in their best interest is critically important.”

Several industry organizations appealed for more time to comment on the proposal, but their request was denied and comments are due Jan. 2, 2024.

Richard Clarke, Chief Insurance Officer at Colonial Surety Company, shared his thoughts about the timing and impact of the fiduciary rule.

Q. Why is the new fiduciary rule being considered/?

A. The U.S. Court of Appeals issued a ruling in 2018 (under a previous administration) that relieved what some considered to be a more favorable definition of fiduciary, and that was considered to be more lenient in attaching responsibility to those persons entrusted with handling investment funds; the new rule is an attempt to make persons defined as “fiduciaries” more responsible through applying a more rigid standard of responsibility.

Q. How does this new proposal build on/change/replace previous fiduciary rules?

A. The new rule would represent the latest in a long line of modifications to the ERISA legislation, which is the primary federal legislation governing employee benefit plans. The proposed amendment/rule would place greater responsibility upon persons involved in providing services to employers, and by extension, employers themselves, theoretically making it easier to accuse these persons of negligence/wrongdoing in performing these services (thus changing the standards for those persons defined in the proposed rule as fiduciaries).

Q. What are some of the key elements of the proposed rule?

A. There are several elements of the proposed new rule and since there is a public hearing scheduled (by the Department of Labor, the regulatory organization for ERISA) for December 12, as well as a deadline for public comments of January 2, 2024 (with lots of public commentary expected), it is difficult to dwell too much on the elements under deliberation/discussion at this time. However, a few of the critical aspects include a redefinition of the term fiduciary, to place greater responsibility upon those qualifying under the new definition, as well as a higher standard of performance both for such persons and the organizations they represent. Essentially, the goal of the new rule is to place greater responsibility upon persons providing investment advice to both the general public, as well as to employers, for employee benefit plans.

Q. What do plan sponsors and advisors need to know about how to prepare for the new requirements?

A. Since the exact detail of the new requirements/definition of fiduciary is so early in the discussion/approval process, it would be premature to rewrite procedural manuals or establish new internal processes relating to providing investment advice at this time. Wait until the exact details of the new rule are finalized, then develop an internal action plan. What we do know at this (relatively) early date is that there will undoubtedly be greater responsibility imposed upon investment professionals, through the redefinition of the term fiduciary, which will be the cornerstone of the new rule.

Related: Another fiduciary rule? Lawmakers push DOL to stop further ‘confusing’ rulemaking

Q. What is PTE-2020-02 and how does that fit into the proposed rule?

A. PTE 2020-02 is the numerical assignment of the portion of the rule relating to “Improving Investment Advice.” Again, what can generally be expected when this rule is amended/finalized is greater responsibility being placed upon investment professionals.

Q. What are the disclosure requirements of the proposed rule?

A. We don’t fully know the disclosure requirements of the rule – this will not be finalized until after the public commentary date. After this date, we’ll have much greater understanding of the individual provisions of the proposed new rule.