Key Updates for Retirement Plan Fiduciaries
As of April 2025, the 401(k) fiduciary landscape is undergoing significant changes due to the U.S. Department of Labor’s (DOL) 2024 Retirement Security Rule. This rule aims to enhance protections for retirement investors by expanding the definition of who qualifies as an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA).
Key Developments
Expanded Fiduciary Definition: The new rule broadens the scope of who is considered a fiduciary. Previously, a five-part test determined fiduciary status, but the updated rule replaces this with a three-part test. Under the new criteria, a financial services provider is deemed a fiduciary if they:
- Make an investment recommendation to a retirement investor.
- Receive a fee or other compensation for the recommendation.
- Represent themselves as acting as a fiduciary or provide advice in a manner that would reasonablybe viewed as a suggestion that the investor engage in or refrain from a particular course of action.
Prohibited Transaction Exemptions (PTEs): The DOL also amended several PTEs, including PTE 2020-02 and PTE 84-24, to align with the new fiduciary standards. These amendments impose additional requirements on fiduciaries, such as adhering to impartial conduct standards and providing written acknowledgments of fiduciary status.
Legal Challenges and Uncertainty
Despite the rule’s scheduled effective date of September 23, 2024, its implementation has been delayed due to legal challenges. In July 2024, federal courts in Texas issued stays on the rule’s enforcement, citing concerns that it mirrored issues found in the 2016 fiduciary rule, which was vacated in 2018. The courts questioned the DOL’s authority to expand the fiduciary definition and expressed concerns about the rule’s potential overreach.
As a result, the rule’s future remains uncertain, pending the outcome of ongoing litigation. The DOL has filed motions to pause the lawsuits, indicating a willingness to revisit or revise the rule in response to the legal challenges.
Implications for Retirement Investors
The 2024 Retirement Security Rule represents a significant shift in the regulatory framework governing retirement investment advice. If implemented, it would hold a broader range of financial professionals to fiduciary standards, requiring them to act in the best interests of retirement investors and manage conflicts of interest. However, the rule’s legal challenges highlight the complexities involved in balancing investor protections with regulatory authority and industry practices.
Retirement investors should stay informed about these developments and consider consulting with financial professionals who adhere to fiduciary standards to ensure their interests are prioritized.
Action Steps for Plan Fiduciaries
The fiduciary landscape for 401(k) plans is in flux, but the direction is clear: greater accountability, transparency, and prioritization of plan participants’ best interests. Thorough, forward-looking fiduciary reviews will help ensure that plan sponsors meet their obligations while strengthening the long-term health of their retirement plans. Fiduciaries should proactively:
- Understand Fiduciary Duties: Know and adhere to the core ERISA duties: loyalty, prudence, diversification, and plan document compliance. Recognize who is a fiduciary (including committee members, investment advisors, etc.).
- Establish a Formal Governance Structure: Create a retirement plan committee with clear roles and responsibilities. Maintain and update a fiduciary charter or committee bylaws. Regularly train fiduciaries on their obligations.
- Document All Decisions: Keep detailed minutes of all meetings and fiduciary decisions. Maintain records of the reasoning behind key choices, especially around investments and service providers.
- Monitor Service Providers: Conduct due diligence when hiring record keepers, advisors, and other vendors.Regularly review performance and renegotiate or replace providers if necessary.
- Follow a Prudent Investment Process: Create and maintain a written Investment Policy Statement (IPS).Select a diversified lineup of investment options tailored to participants’ needs. Review investment options at least annually, and act promptly if performance lags or risks emerge.
- Focus on Participant Communication: Ensure disclosures (like fee notices, summary plan descriptions, and investment disclosures) are accurate and timely. Communicate in plain language to help participants make informed decisions. Offer educational opportunities (webinars, one-on-ones, retirement calculators).
- Monitor Plan Fees: Understand all direct and indirect fees charged to the plan and participants. Perform regular fee benchmarking studies to assess competitiveness.
- Stay Informed and Updated: Monitor changes in laws, regulations, and market trends. Engage legal counselor fiduciary consultants as needed for complex issues.
As 401(k) plan sponsors and fiduciaries prepare for mid-year reviews, it is critical to understand the evolving fiduciary landscape. Engaging the right service providers will ensure you are staying informed and minimizing fiduciary risks as much as possible.
