A Rule in Flux, Employee Benefits Committee Newsletter

ABA Section of Labor and Employment Law

December 1, 2017

As litigation about the legality of the Department of Labor’s controversial Fiduciary Rule reaches federal circuit courts, the current administration has turned into the Fiduciary Rule’s biggest adversary.

Over a year ago, insurance companies started a broad offensive against the Fiduciary Rule in federal courts across the country. Challengers to the rule have filed six cases in three federal district courts to date. Despite the success of the Department of Labor (“DOL”) in defending the Fiduciary Rule, recent changes of position by the Department of Justice and DOL have cast a shadow over the Fiduciary Rule’s future.


The Fiduciary Rule (the “Rule”) was the product of rulemaking that started nearly eight years ago, in 2010.  DOL sought to replace its 1975 regulation’s five-part test for fiduciary status with a new interpretation of ERISA’s definition of an investment advice fiduciary.  In 2011, DOL withdrew that proposal, and on April 20, 2015, issued a new proposal that again sought to replace the 1975 definition and also sought to revise administrative exemptions under which fiduciary investment advisors may obtain relief from ERISA’s prohibited transaction provisions.

DOL was concerned that its 1975 definition of “fiduciary” no longer covered many of the financial services provided to retirement investors in the 21st century.  Of particular concern was the individual retirement account (“IRA”) market.  According to a 2017 survey by the Investment Company Institute, IRAs hold $8.2 trillion in retirement assets.  This number is likely to increase substantially over the next five years as DOL estimates plan participants will rollover more than $2 trillion of assets from ERISA-protected 401(k) plans into IRAs.  Given the size of this market and the ERISA enforcement gap, DOL sought to promulgate a rule that protects individuals from the detrimental effects that conflicts of interest have on their retirement savings.

The regulation resulting from DOL’s rulemaking imposes fiduciary status on a financial professional that provides investment advice to an individual or a Title I plan for a fee, whether or not that advice is given on a “regular basis”.  This brought under ERISA’s umbrella a number of investment advisers who provide advice on a one-time basis.

The rule also revised the administrative exemption structure under which fiduciary investment advisers may obtain relief from ERISA’s prohibited transaction rules when they recommend the purchase of proprietary investment products in which they have an economic interest. The exemptions allow fiduciaries to engage in these transactions if they comply with conditions designed to mitigate their conflict of interest. The rule includes the new Best Interest Contract Exemption (“BICE”) requiring relevant fiduciaries to (1) give advice in the retirement investors’ best interest; (2) charge only reasonable compensation for the services provided; (3) disclose material information to the retirement investors, such as conflicts of interest; and (4) enter into contracts with the retirement investors that promise the fiduciary will adhere to these standards, without limiting liability or requiring class action waivers.  DOL also revised Prohibited Transaction Exemption 84-24 to include a requirement that fiduciaries comply with the same impartial conduct standard in the BICE and to limit its application to transactions involving fixed-rate annuities rather than variable and fixed-index annuities (whose rates of return are linked to a market rate rather than pre-determined rates).  These products are sold to retirement investors on a one-time basis, bringing the financial professionals who sell the products for compensation under the purview of the Rule.