In 2023, Major League Baseball implemented rule changes designed to improve the game for players and fans. This year, MLB is adjusting those rules to make sure they accomplish what was intended.1 A similar thing is happening in financial services.
The financial industry has been making changes to rules governing investment advisors in order to improve outcomes for retirement investors. The early adjustments included setting standards for investment advice and creating low-cost products with transparent pricing and no commissions. As a result, investors can choose to work with financial professionals who adhere to a fiduciary standard of care. Advisors who act as fiduciaries are legally obligated to provide unbiased advice and put their clients' interests ahead of their own. They typically are compensated by charging a fee for advice (a model called “fee-only” or “fee-based”) rather than by earning commissions on the products they sell.
As with the MLB’s effort to refine its rulebook, the Department of Labor has proposed a new rule called the Retirement Security Rule: Definition of an Investment Advice Fiduciary (RSR). It is intended to further protect investors by more clearly defining when a financial professional who offers investment advice to participants in workplace retirement plans, and other types of retirement plans, is acting as a fiduciary and must meet fiduciary obligations.2,3
Among other things, RSR would protect investors by expanding the fiduciary definition so that it applies to:
Recommendations for all investment products. Under RSR, any advice offered on any product with an investment component would be considered fiduciary advice. For example, advisors who recommend variable and fixed annuities, which are insurance products with investment components, would be obligated to act in the investors’ best interest.4
This is a critical point because the insurance industry has been slow to transition from commissions to fees. One consequence is that it is difficult for retirement investors to know whether advisors are recommending annuities because these products can help clients meet their goals or because the products pay the advisors a high commission. Since annuities are one of the few sources of guaranteed income for retirees, ensuring trust between retirement savers and their advisors is critical. Over the long-term, offering conflict-free advice and low-cost, commission-free annuity options could help improve retirement outcomes.
All recommendations regarding retirement savings. Currently, if a financial professional does not offer “regular” advice, they are not considered to be acting as a fiduciary. RSR changes the definition so that financial professionals who offer recommendations regarding rollovers, transfers, or distributions from workplace retirement plans (or IRAs) will be acting as fiduciaries – even if they do not offer advice to the individual on a regular basis.3
Advice to plan sponsors. Financial professionals often advise employers about which investments to make available to participants in workplace plans. If the advisors recommend investments that have high fees or commissions, it can limit plan participants’ ability to accumulate enough savings for retirement. Under the proposed rule, financial professionals who offer advice regarding plan investments would be acting as fiduciaries.3
The goal of RSR is to create a common fiduciary standard that ensures investors understand when their investment professional is acting as an advisor versus when they are acting as a broker. The change would eliminate exposure to conflicted advice that erodes investment returns and impairs retirement outcomes.3
Change can be challenging
Rule changes often are controversial, and there has been push-back against the DOL’s proposed expansion of the fiduciary definition. In general, the objections are coming from:
Broker-dealer firms and lobbying groups that argue Regulation Best Interest (Reg BI) is adequate to protect investors. Reg BI requires financial professionals to have a “reasonable” basis to believe that the recommendations they make are in the best interest of the client. However, the standard only applies to securities transactions or investment strategies involving securities; it does not apply to annuities and other non-securities.
Insurance companies and lobbying groups that argue the National Association of Insurance Commissioners’ (NAIC) Suitability in Annuity Transactions Model Regulation is adequate. The model, which applies only to annuities, explicitly states that it is not a fiduciary standard. It’s interesting to note NAIC also states that neither commission compensation nor production incentives for annuity salespeople create material conflicts of interest.5 The model must be adopted at the state level and, so far, 41 states have done so.6
Proponents of the DOL’s proposed updated definition of an investment advice fiduciary believe it is needed to close loopholes in current regulation, helping ensure investment advisors always act in clients’ best interests. The goal is to strengthen investor trust in advisor recommendations and improve portfolio returns over time, allowing retirement investors to accumulate more savings for the future.
1 Matt Snyder. MLB rule changes: Pitch clock tweak, widened runner's lane, more coming in 2024 despite MLBPA objection. December 21. 2023. Cited January 31, 2024.
2 Fact Sheet: Retirement Security Proposed Rule and Proposed Amendments to Class Prohibited Transaction Exemptions for Investment Advice Fiduciaries. U.S. Department of Labor, Employee Benefits Security Administration. October 31, 2023. Cited January 31, 2024.
3 Retirement Security Rule: Definition of an Investment Advice Fiduciary. Federal Register. November 3, 2023. Cited January 31, 2024.
4 Erin Cho and colleagues. DOL Releases New Proposed Regulation Regarding Investment Advice Fiduciaries. Mayer|Brown. November 16, 2023. Cited February 1, 2024.
5 Suitability In Annuity Transactions Model Regulation (#275), Best Interest Standard Of Conduct Revisions, Frequently Asked Questions. National Association of Insurance Commissioners. July 19, 2021. Cited February 1, 2024.
6 The NAIC Annuity Suitability “Best Interest” Model Regulation. National Association of Insurance Commissioners. January 2024. Cited February 1, 2024.