Biden’s 401(k) Advice Rule Finalized Over Wall Street Objections

The US Labor Department has released a closely watched rule that will expand strict fiduciary standards of conduct to cover more retirement plan advisers, and has already drawn ire from Wall Street.

Bloomberg News

The rule from the DOL’s Employee Benefits Security Administration could equip regulators with more power to oversee Wall Street heavy hitters and require companies to comply with expensive disclosure exemptions.

EBSA will release the regulation on its website Tuesday following months of pushback from the finance sector, particularly in insurance and annuities. The final rule is due to go into effect 150 days after its April 25 publication in the Federal Register, with a staggered full compliance date set for a year after that in September 2025.

Firms like Charles Schwab & Co Inc. have called for the rule to be withdrawn, as have major industry groups like the Insured Retirement Institute, which counts giants from Prudential Financial Inc. to Allianz Life Financial Services to UBS Financial Services Inc. among its membership.

Elements of the final rule differ from the November proposal, which EBSA officials attributed to the agency’s consideration of more than 20,000 public comments and a US Court of Appeals for the Fifth Circuit ruling that overturned a prior Obama-era iteration of the rule in 2018.

“There’s nothing in these clarifications or changes that I think anyone should interpret as a watering down or real change in position from the proposal,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez. “These are really more to address these comments and to make sure that where it seemed like there was some clarification [needed] to make sure that we’re all on the same page.”

One prong of a three-part test that appeared in the proposal, focusing on whether an adviser has discretion over retirement assets, doesn’t appear in the final rule. That test was tweaked to focus on the context of a “trust and confidence” relationship between a retirement saver and adviser to determine fiduciary status, according to Principal Deputy Assistant Secretary Ali Khawar.

The final rule also clarifies that offering investment information or education to retirement savers isn’t considered advice under the rule, leaving room for human resources employees of plan sponsors to provide participants with plan-related materials without being considered a fiduciary. The ERISA Industry Committee was among the interest groups to raise concerns about plan employees who aren’t investment professionals being improperly classified as fiduciaries under the language of the proposed rule.

‘Highest Known’ Standards

Prohibited transaction exemptions have been revised under the final rule as well. EBSA didn’t finalize certain disclosure provisions from the proposal, in an attempt to harmonize the agency’s approach with the Securities and Exchange Commission’s Regulation Best Interest standard, Khawar said.

The prohibited transaction exemption amendments will become effective on Sept. 23 along with impartial conduct standards and fiduciary acknowledgment requirements. All remaining conditions of the amended exemptions will go into effect one year later.

Fiduciary standards under the Employee Retirement Income Security Act of 1974 are the “highest known to the law,” an appeals court ruled in 1982. They require advisers to put their clients above all else, threatening the hefty commissions many financial advisers make for selling specific investments to clients.

Without proper oversight, older investors are prone to being duped into paying higher fees for riskier products, EBSA has said in explaining its reasoning for issuing the rule.

Industry critics of the DOL’s proposal have said recent SEC regulations, combined with evolving state standards, already protect retirement investors sufficiently. But EBSA officials have been zeroed in on account rollovers from ERISA-regulated plans into individual retirement accounts and annuities.

“This regulatory overreach runs counter to the will of Congress and court decisions,” said Rep. Virginia Foxx (R-N.C.), who chairs the House’s Education and Workforce Committee, in a statement on the final rule. “This Committee will continue to push back on the Biden administration’s efforts to harm Americans’ retirement security.”

The new rule will limit options for millions of retirement savers approaching the age of 65, most of whom will not have access to traditional pensions and therefore need annuity options to provide lifetime income, said Susan Neely, president and CEO of American Council of Life Insurers, in a statement.

Timing Questions

Others welcomed the Labor Department’s new rule as a recalibration of the standard to apply more widely, protecting more retirement savers and plan sponsors from conflicts of interest.

The rule closes a regulatory gap, removing the regular basis requirement for an investment adviser to qualify as a fiduciary, according to Brian Graff, chief executive officer of the American Retirement Association.

“The DOL, as reflected in these final releases, thoroughly canvassed the comments, took them into account, and made adjustments where they could without compromising the high standard of care and loyalty that Congress envisioned in ERISA,” said Stephen Hall, legal director and securities specialist at Better Markets.

Critics have also complained, including in an April 15 coalition letter to the DOL, that the agency has rushed the rulemaking by limiting the public comments on the proposed rule to a 60-day period that stretched over several end-of-year holidays in late 2023.

“I don’t think 60 days was too short, it’s certainly not reflected in the kind of record that we had to grapple with once the comment period closed,” Khawar said. “When you look at the number of changes that we made in response to comments, it’s hard to say that that this is a final rule and final set of exemptions that don’t reflect a really robust set of comments and an agency that took those comments very seriously.”

DOL has attempted to rewrite the rules governing fiduciary conduct multiple times going back more than a decade.

Since the 2018 ruling vacated a past iteration of the fiduciary rule, guidance the department has used to extend its regulatory control over rollover advice has also faced increased legal scrutiny in Florida and Texas.

“This is not a warmed-over version of the 2016 rule the Fifth Circuit was looking at and struck down,” Khawar said of the new final rule. “It’s a very different approach and it is much more tailored to the kinds of relationships where it is appropriate to have these kinds of protections attached.”