Latest ERISA Developments on the IRA Rollover Fiduciary Rules, the DOL’s QPAM Exemption Amendment Proposal and the DOL’s ESG Rules
As the outdoor concert season approaches, lawyers at Proskauer eagerly await not the music but instead the latest developments on ERISA issues. Three top concerns include the ongoing saga of U.S. Department of Labor (“DOL”) guidance on investment advice fiduciaries and whether the fiduciary standard applies to advice on whether to take a rollover, finalization of the DOL’s QPAM Exemption amendment proposal, and resolution of court challenges to the DOL’s final “ESG” rules.
For years, the DOL has tried to expand what it means to provide “investment advice” for determining fiduciary responsibility for ERISA plans and individual retirement accounts (IRAs) under ERISA and the Internal Revenue Code. The department has long aspired to consider advice regarding rollovers as fiduciary investment advice, despite prior guidance stating otherwise.
To be deemed a “fiduciary” for an ERISA plan or an IRA, a person must meet one of the three criteria as provided by Section 3(21) of ERISA and Section 4975(e)(3) of the Code. It means the individual or entity exercises any discretionary authority or control, renders investment advice for compensation, or has any discretionary authority or responsibility in administration. The investment advice prong is particularly challenging, with the DOL having set forth a “five-part test” in 1975 to determine when a person is providing investment advice. However, the DOL replaced that test in 2016 with a new fiduciary regulation, which sought to broaden the scope of investment advice. In 2018, the US Court of Appeals for the Fifth Circuit vacated this rule, and the DOL reinstated the “five-part test.”
The DOL has since issued Prohibited Transaction Class Exemption 2020-02, which grants “investment advice” fiduciaries permission to offer advice that affects their compensation, and allows them to engage in certain prohibited “principal transactions.” In the announcement, the DOL stated that the Deseret Letter, which had said that IRA rollover advice did not qualify as “investment advice,” was an “incorrect analysis.” The DOL shifted to describe advice on IRA rollovers as recommendations to transfer an ERISA plan’s property and effectuate the rollover transaction.
Another issue on the radar is the DOL’s QPAM Exemption, which permits qualified professional asset managers to continue using affiliated brokers for ERISA plan investment transactions. The DOL issued a proposed amendment last year, which would significantly restrict the usage of this exemption.
Finally, the DOL’s ESG Rules have faced multiple court challenges, notably in early 2021 when Labor Secretary Marty Walsh declined to appeal a federal court decision invalidating the previous administration’s ruling. In light of these challenges, the DOL may issue guidance that impacts whether ESG considerations may be used by ERISA fiduciaries as part of their investment decision-making process.
Related Facts
– The DOL’s ESG proposal was designed to clarify that fiduciaries cannot make decisions about retirement investments based solely on environmental, social, or governance factors unless other factors determine that such investments are equal to or better than competing options.
– Industry experts estimate that approximately $4.5 trillion worth of assets will be subject to the DOL’s ESG guidance.
– The DOL cites the executive order issued on January 20 that called for a review of policies restricting investments in certain industries and an analysis of the impact of climate change on retirement plans as the reason for pausing the proposals.
Key Takeaway
Due to the changing nature of the regulatory environment, the ERISA rules governing IRAs and rollovers may face updates and revisions. Financial advisors and asset managers must keep up to date with both the current rules and any changes to best protect their clients’ interests.
Conclusion
The DOL’s ongoing efforts to expand and refine its guidance on the definition of investment advice and related fiduciary rule requirements continue to impact the ERISA landscape. As such, financial advisors and asset managers must stay abreast of the evolving regulatory environment around QPAM exemptions, ESG investment, and IRA rollovers, and adapt their strategies to position themselves and their clients optimally.
