Fiduciary Rule

The concept of fiduciary duty in retirement plans originates in ERISA, which imposes a statutory fiduciary standard on plan administrators, trustees, and investment managers of employer-sponsored retirement plans. Under ERISA, a fiduciary must act solely in the interest of plan participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable administrative expenses, following the prudent person rule, diversifying plan investments, and adhering to the plan document.

The application of a fiduciary standard to retail investment recommendations — particularly for IRA owners and rollover recipients — has been the subject of extensive regulatory activity and litigation. The DOL's 2016 fiduciary rule attempted to significantly expand the definition of investment advice fiduciary under ERISA and the Internal Revenue Code to include brokers and insurance agents who make one-time recommendations about IRAs and retirement plan rollovers, subjecting them to the best-interest standard rather than the lower suitability standard that had previously applied. A federal appeals court vacated this rule in 2018.

The SEC's Regulation Best Interest (Reg BI), which took effect in June 2020, established a best-interest standard for broker-dealers making recommendations to retail customers, including recommendations involving retirement accounts. Reg BI requires brokers to act in the customer's best interest at the time of the recommendation, disclose conflicts of interest, and maintain policies and procedures designed to address those conflicts. Critics argue that Reg BI falls short of a true fiduciary standard because it does not require ongoing monitoring of recommendations or require brokers to always prefer the lower-cost option.

The DOL issued a new fiduciary investment advice rule in 2024, again seeking to close what regulators described as loopholes that allowed rollover recommendations and certain annuity sales to IRA owners to avoid fiduciary scrutiny. This rule was challenged in federal courts and its implementation was contested, continuing a long regulatory debate about the appropriate standard of care for retirement investment recommendations. Under the rule, a service provider who makes investment recommendations on a regular basis as part of an ongoing advisory relationship with a plan, participant, or IRA owner, and who receives compensation for doing so, would generally be treated as a fiduciary.

For retirement plan participants, the practical significance of the fiduciary standard is that a true fiduciary cannot recommend investments primarily because they pay the adviser higher commissions, cannot steer clients into more expensive share classes when cheaper alternatives are available, and must provide advice that is objectively in the client's best interest given their financial situation, needs, and goals. Distinguishing between advisers who operate under a fiduciary standard and those who operate under a suitability standard is an important step for anyone seeking guidance on retirement plan investments or rollovers.