By David Imhoff*
On April 8, 2016 the Department of Labor published a rule in the Federal Register that imposes new fiduciary requirements on a broad array of financial advisors. This will require newly covered advisors to act in the best interests of their clients, and will impose new documentation and verification requirements. While the rule’s subject matter may seem arcane, it has the potential to have an outsize impact on both American’s retirement savings and the investment-management industry.
Over the past several decades, American retirement planning has shifted from a landscape dominated by defined-benefit pension plans to one based largely on personal retirement accounts. In the third quarter of 2016, American retirement savings had reached almost $25 trillion. The majority of this sum is invested in personal retirement accounts, including $7.8 trillion in IRAs and another $7 trillion in employer-sponsored accounts including 401(k)s. For a sense of scale, US gross domestic product (GDP) the same year was $18.8 trillion. Because these accounts are largely self-directed, investment strategies used and fees charged can vary wildly, a fact that has generated considerable controversy over the years.
The Employee Retirement Income Security Act of 1974 (ERISA) imposes “trust law standards of care and undivided loyalty” on retirement plan fiduciaries, a category that includes certain persons providing investment advice in exchange for compensation. An advisor’s fiduciary status is therefore critical to determining the scope of their responsibilities to a client. In 1975, the Department of Labor established a five-part test to determine if a person rendering “investment advice” was a plan fiduciary, with all five elements needing to be satisfied. Specifically, the person must give “investment advice”:
- About the value of investments, or the advisability of making investments;
- On a regular basis;
- Pursuant to an agreement with the plan;
- That the advice will serve as a primary basis for investment decisions; and
- That the advice will be individualized to the needs of the plan.
This narrow standard was written before IRAs and 401(k)s became the primary vehicles for retirement savings and largely exempts advisors dealing with these accounts from fiduciary responsibilities or conflict of interest rules.
The Department of Labor’s new rule dramatically expands the number of advisors who are subject to ERISA’s fiduciary responsibilities. Specifically, anyone who provides, for compensation:
- A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA.
- A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, distributions, or transfers from a plan or IRA … 
The overall impact of these changes is extremely difficult to quantify, although the Department of Labor estimates that mutual fund underperformance associated with conflicts of interest has the potential to cost IRA investors alone $95 – $189 billion over the next ten years. This is set against estimated compliance costs of $10 – $31.5 billion over the same time period.
The new fiduciary rule has the potential to significantly alter the business models of many financial advisors, and has been subject to considerable criticism within both the financial industry and the incoming administration. On February 3, 2017, President Trump issued a memorandum to Secretary of Labor directing the department to reevaluate and potentially rescind this important new consumer protection. The final rule became effective on June 7, 2016 and has an applicability date of April 10, 2017. Modifications or rescission will therefore require another round of notice and comment rulemaking, and the rule’s fate is currently unclear.
The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.
*David Imhoff is a Junior Editor on MJEAL. He can be reached at firstname.lastname@example.org.
 Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment Advice, 81 Fed. Reg. 20945, 20946 (Apr. 8, 2016) (to be codified at 29 CFR Parts 2509, 2510, and 2550). [hereinafter Fiduciary Rule]
 Retirement Assets Total $25.0 Trillion in Third Quarter 2016, Investment Company Institute (Dec. 22, 2016), https://www.ici.org/research/stats/retirement/ret_16_q3.
 National Income and Product Accounts Gross Domestic Product: Fourth Quarter and Annual 2016 (Second Estimate), Bureau of Economic Analysis (Feb. 28, 2017), https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm.
 See Letter from Warren Buffett to the Shareholder of Berkshire Hathaway, Inc. at 21-22 (Feb. 25, 2016) (available at berkshirehathaway.com/letters/2016ltr.pdf).
 Fiduciary Rule at 20946.
 Definition of “Fiduciary,” 29 CFR § 2510.3–21 (1975).
 Fiduciary Rule at 20948.
 Id. at 20950.
 Id. at 20951.
 See Press Release, The White House, Presidential Memorandum on Fiduciary Duty Rule (Feb. 3, 2017) (available at https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-memorandum-fiduciary-duty-rule).
 Fiduciary Rule at 20946.