How the New DOL Fiduciary Rule Affects IRA Owners

On April 25, 2024, the Department of Labor (DOL) published regulations on the “fiduciary rule” that applies to those who provide retirement investment advice to individuals and plan administrators. The new rule contains some details that we will not address here, but the essence of the regulation is straightforward, and this summary may prepare self-directed IRA (SDIRA) owners to ask the right questions of anyone who provides them with investment advice.

 

The Fiduciary Rule: A Quick History

The Employee Retirement Income Security Act (ERISA) was enacted in 1975. Shortly after that, the DOL created rules to clarify a particular ERISA provision that defines a fiduciary. At the time, these regulations—including the “five-part test”—seemed like a good approach in articulating when advisers met these conditions and would owe a special duty of care to their clients. This high standard of care, which requires advisers to place their client’s interests above their own, is mandatory for fiduciaries.

Things have changed in the almost 50 years since ERISA became law; back then, 401(k) plans didn’t exist and IRAs had just been authorized. Now, 401(k) plans (and similar cash or deferral arrangements) prevail, and IRAs contain trillions of dollars. Because of these changes, including the frequency of participants rolling over plan assets into IRAs, the DOL decided to update the fiduciary rule to reflect the current situation.

 

The New Fiduciary Rule

After numerous hearings and years of writing a new rule, the DOL released final regulations in 2016. However, the rule was challenged in federal court and was vacated by the U.S. Court of Appeals for the Fifth Circuit in 2018. A proposed rule was released last fall, and over 400 comment letters were submitted to the DOL. After analyzing the comments and holding a public hearing, the DOL issued a new final rule that is intended to clarify advisers’ responsibilities and to protect retirement investors. Here is a simplified paraphrase of the new law, which is slated to become effective on September 23, 2024.

An investment advice fiduciary is a person who provides a recommendation for a fee or other compensation (direct or indirect) in either one of the following contexts:

1

The person makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor that the recommendation is based on the retirement investor’s needs or circumstances, reflects the application of professional judgment to the retirement investor’s particular needs or individual circumstances, and may be relied upon as advancing the retirement investor’s best interest.

2

The person represents or acknowledges that they are acting as a fiduciary with respect to the recommendation.

Without dissecting all the nuances contained in this rule, let’s focus on the DOL’s own words as it explains the essence of fiduciary regulation. Not all investment advice that is paid for is treated as fiduciary advice; rather, the recommendation must be made under circumstances that indicate to a reasonable investor that, essentially, “the entity has held themselves out as a trusted advice provider and invited the retirement investor’s reliance on them.” This practical, real-world definition focuses not on what one party or the other intended (or not), but on what a reasonable person in similar circumstances would expect.

 

What Does This Rule Mean for Self-Directed IRA Owners?

Some financial professionals and industry groups oppose any effort to reform the fiduciary rule because it will require more diligence from them, which may cost more and increase costs for their clients. This may make retirement investment advice less accessible to some individuals, but whatever happens with the rule, through litigation or future guidance, several things seem likely.

  • IRA investors will ask tougher questions. Because the DOL has extended the rule to specifically include IRA owners and beneficiaries, they are now more likely to ask investment providers questions such as “Do you consider yourself a fiduciary under the new rule? Can I rely on your advice as in my best interest?”
  • IRA investors may encounter some resistance. The new regulation may require advisers to clarify exactly what their role is. Some may offer “creative” explanations that attempt to minimize any duty that they owe to investors. Always do your due diligence before doing business with those who try to get the benefit of being a “trusted advisor” without also taking on the duties that come with being in this relationship.
  • Investment sponsors and promoters may be considered investment advice fiduciaries. The DOL’s new rule expands the universe of those who owe a special duty of care to retirement investors. Those who regularly provide investment recommendations and create a reasonable expectation that their advice can be relied on may have this duty—even if they try to avoid it. If the total facts and circumstances meet the elements of the rule as described above, these advisors are subject to a higher standard of care.

SDIRA owners have the right to receive unconflicted investment advice that is in their best interest. The DOL’s new fiduciary rule is another step toward making this a reality, and it may apply to investment providers who have not typically considered themselves fiduciaries. The DOL’s aim is not to create a duty for all those who may be compensated for their investment advice but rather to create a duty for those who hold themselves out as trusted professional advisers.

 

More Information

While STRATA does not provide specific investment or financial advice, we do offer a comprehensive Resource Center. Here, you can access valuable insights into important SDIRA rules and regulations, frequently asked questions, insightful due diligence tips, and a wealth of other pertinent information to empower your financial decisions. 

 

Tags: IRA, SDIRA, self-directed ira