By Dave Strausfeld, J.D.
Many financial advisers who make recommendations about how to invest for retirement would be subject to new ethical requirements under regulations recently proposed by the U.S. Department of Labor (DOL) that are designed to address conflicts of interest in providing retirement investment advice.
The changes widen the situations in which a financial services provider qualifies as an "investment advice fiduciary" and thus is subject to related duties of prudence, loyalty, and so forth.
Announcing the DOL's proposed regulations, known as the "retirement security rule," President Biden said on Oct. 31: "When you pay someone for retirement advice, they must give you advice that's in your best interest, not whether it gets them the best payday."
The new, broader definition of "investment advice fiduciary" would sweep in anyone who provides investment advice or makes an investment recommendation to a retirement investor for a fee or other compensation and either:
- Has discretion over investment decisions for the retirement investor;
- Makes investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under circumstances indicating that it is based on the individual circumstances of the retirement investor and may be relied upon as in their best interests; or
- States that they are acting as a fiduciary.
To help understand how the proposed retirement security rule might affect CPAs and CPA financial planners, the JofA spoke with DOL Deputy Assistant Secretary Timothy D. Hauser. He is the chief operating officer of the Employee Benefits Security Administration, the branch of DOL responsible for the proposed regulations. The Q&A has been lightly edited for clarity and condensed.
If you were to broadly describe how the DOL's proposed retirement security rule would affect CPAs, what would you say?
Timothy Hauser: The rule isn't really aimed at CPAs. Its purpose is to make sure that people who hold themselves out as being trusted advisers, as making investment recommendations that people can rely upon as in their best interest and based on their individual circumstances, are held to that standard, if that's how they're holding themselves out. But unless you actually make an investment recommendation and you fall into one of the three defined categories [described above], this rule isn't going to make you a fiduciary. So, off the top of my head, I don't think a huge number of accountants are likely to be directly affected by the rule.
As you know, CPAs are sometimes asked investment questions. Do CPAs need to worry about the retirement security rule if they respond informally to a client and don't receive a fee for their advice?
Hauser: If I assume they're not getting a fee in connection with the advice, that it's not part of what they're charging for, and they're not getting a commission or third-party payments, probably there's not much risk of falling within the scope of the retirement security rule. But I'd be a little careful about making investment recommendations to people generally if that's not your business. To be picked up by the rule, unless you've told the customer you're a fiduciary, making investment recommendations would need to be a regular part of your business, and you would have to be compensated for it, and it would have to be under circumstances where you seem to be taking the individual circumstance of the investor into account and suggesting that they can rely upon this advice as in their best interest. I don't know how often that situation arises for accountants, but I don't think very often.
Are CPAs who specialize in financial planning services subject to the retirement security rule?
Hauser: Yeah, they could be, sure. This test doesn't really turn on what your specific profession is. Really, the issue is always, are you making a recommendation to somebody — and a recommendation is really a call to action in this context, suggesting to someone that you should hold this asset, buy this asset, pursue this investment strategy, be in this kind of investment account. If you're making that kind of investment recommendation and, on top of it, you regularly make recommendations to customers, and you're holding yourself out as someone who makes individualized recommendations based on the customer's best interest, you could be a fiduciary as an accountant, sure. But you have to meet those requirements and be compensated for those services, so, yes.
If a CPA financial planner doesn't directly manage investments, does the retirement security rule still apply?
Hauser: Well, if you actually manage somebody's plan assets, you'd be a fiduciary because the ERISA statute [Employee Retirement Income Security Act of 1974] provides that if you exercise authority over plan assets — or IRA assets, for that matter — you're a fiduciary. The retirement security rule is kind of a different fiduciary test, and it doesn't turn very necessarily on your having authority over plan assets. If you're advising somebody on how to invest their retirement assets, their IRA, or their plan assets, and you meet the retirement security rule's test, you could be a fiduciary, and you wouldn't have to directly manage those assets if you're making the recommendations.
Will a CPA financial planner who recommends a retirement account rollover to a client need to do anything differently under the new rules than they do now?
Hauser: They don't have to do anything differently if they're not a fiduciary. But to the extent they're recommending that somebody take a rollover, and they're doing it under those circumstances I described where they regularly make investment recommendations and they're holding themselves out as a trusted adviser— those sorts of circumstances — when they do a rollover, they would need to document the bases for that recommendation and share those documented bases with the customer.
They would also need to think about — and this is part of the documentation — "Well, why is the customer better off if they roll the money over than if they don't?" Normally, we'd expect people to think about, "Well, what's the customer invested in? What are they giving up, what do they gain from taking the money out of the plan or the IRA?"
Be thoughtful about what the options are within the plan, what the options are outside the plan, what the associated fees and expenses and investment possibilities are. Just make sure that you know the recommendation is being driven by what's in the best interest of the customer. That would be the chief obligation.
[Editor's note: For more on relevant rollover considerations, see "Financial Planning Aspects of 401(k) Rollovers," JofA, July 12, 2023.]
CPAs are already subject to strict professional standards, so does the retirement security rule require anything of them beyond what their CPA license does?
Hauser: This is not the regulation of CPAs per se, and, like I said, ordinary accounting work isn't what this covers. This is about people making investment advice. But in that context, if the person really regularly makes investment recommendations, and if they do it in circumstances that indicate they're acting in the customer's best interest, they would have some additional obligations.
Those obligations are chiefly these: They need to be prudent in what they recommend, so the recommendation should be a good one; it should adhere to a standard of care. They should be loyal, which means they should be putting their customer's interest first; they shouldn't be recommending a product because they have a financial stake in that product, for example, even though they have something they could recommend that would be better for the customer. They have to be honest with the customer and make sure their descriptions of the investment and its attributes and their fees and comp and the like are accurate. And they can't overcharge them. If they've done those things, they're 90% of the way home.
How is overcharging customers to be determined?
Hauser: Primarily, I would say it's a market kind of test. You should actually be rendering the services for which you're charging the customer. Your charges should be in line with market prices, and you shouldn't be misleading the customer about what those services are. Interestingly enough, this requirement already applies in the plan universe, even if you're not giving fiduciary advice and even if you're not a fiduciary. If you're providing services to an ERISA plan or to an IRA, you already have a duty not to overcharge and to charge someone reasonable compensation. So that's one thing that really doesn't change much with this rule.
As you know, DOL finalized a fiduciary rule in 2016 that was struck down by the Fifth Circuit. How do you think the new rule will fare in court?
Hauser: We think it should fare well in the courts. I mean, we've been very, very responsive to the concerns the Fifth Circuit expressed. We've written the rule carefully in a way that's mindful of the Fifth Circuit opinion [Chamber of Commerce v. U.S. Dep't of Labor, 885 F.3d 360 (5th Cir. 2018)] and mindful of what the ERISA statute provides as well. This is a very different rule than the 2016 rule was.
Also, the regulatory background has changed. In the Obama administration, when we did that rule, the proposal stuck out much more in the regulatory landscape than this one does. In the intervening years, the SEC moved forward with "Regulation Best Interest," which imposes very similar requirements on broker-dealers when recommending an investment strategy or transaction involving securities to retail customers. And the National Association of Insurance Commissioners moved forward with a best-interest standard of sorts. And so, we're now regulating against a backdrop where other regulators have seen fit to move toward the best-interest standard. In the case of the SEC in particular, the regulatory framework is very, very similar to what we're doing here for the entire retirement marketplace.
So, it's a very different regulatory backdrop; it's a very different rule. And I think we've taken all the input we've received seriously, and, obviously, we especially take seriously what the Fifth Circuit had to say to us. So, I'm optimistic.
How would the retirement security rule be enforced? For instance, would a client be able to sue a CPA financial planner claiming a breach of a duty of prudence or loyalty?
Hauser: This rule only has the enforcement mechanisms that are in the ERISA statute. There's no new enforcement structure here as there was in the 2016 rule. So, if you're giving advice to somebody in an ERISA-covered plan, telling them to roll money out of the ERISA plan, telling them what investments to make within the plan, you could be subject to an ERISA lawsuit based on that. You know, the plan participant could sue you under Section 502(a) of the statute if you were a fiduciary and you violated the prudent standard or the duty of loyalty or the like. In the IRA market, if you're giving advice to an IRA customer, there is no private right of action. There's just the excise tax. So, nothing we've done would expose you to a lawsuit in the IRA market.
Is there anything important we haven't covered about the proposed retirement security rule that you think CPA financial planners would benefit from knowing?
Hauser: Well, I just want to emphasize the policy goals we're trying to promote here, which is how vitally important it is to people that they get good advice on how to invest for retirement. When ERISA was first enacted in 1974, everybody was in a defined benefit plan to the extent they had a plan, and those investments were managed by professional money managers. We've gone from that to the world we have today, where there's just a bewildering array of stuff people can invest in. There's a lot of complexity to these investments. You know, a lot of the annuity products out there are quite complicated. They can be quite beneficial to people, but they're also quite complicated, and a lot of these investments have pretty significant conflicts of interest associated with them. You know, people are getting incentivized to recommend one thing rather than another thing.
All this rule is trying to do is make sure that professionals recognize the importance of their retirement advice. There's a whole world of people who aren't expert in financial matters who are dependent on these investment professionals getting it right. And I think they're better served and this whole marketplace is going to be better served if people just take the role seriously and adhere to those basic principles of prudence and loyalty and candor and not overcharging folks. And that's not all that much to ask of folks who are in a subsidized marketplace. I mean there are significant tax advantages that go with these retirement investments. It's not too much to ask in exchange that they put the investor's interest first and look out for people in what are really hard decisions.
[Editor's note: CPA financial planners are subject to similar professional ethical requirements, and additional ones, under state accountancy laws, the AICPA Code of Professional Conduct, and the AICPA Statement on Standards in Personal Financial Planning Services.]
DOL held a public hearing on the proposed retirement security rule in mid-December.
— Dave Strausfeld, J.D., is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at David.Strausfeld@aicpa-cima.com.