Will DOL Ultimately Succeed in Changing the ‘Five-Part Test’?

In the final week of April, the Department of Labor (DOL) released its much-awaited Final Rule that defines what it means to be an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). 

This signifies the culmination of a long-standing effort, initiated in 2010, to expand the scope of individuals considered investment advice fiduciaries. 

The Final Rule is a package consisting of a new final rule and amendments to three existing prohibited transaction exemptions.

Back in 1975, the DOL established the "five-part test" as the standard for defining an investment advice fiduciary. According to this test, an individual qualifies as a fiduciary if they: (1) provide investment advice or recommend investment actions, (2) do so regularly, (3) under a mutual agreement or understanding, (4) with the understanding that their advice will be a primary factor in investment decisions, and (5) tailor their advice to the specific needs of the plan.

In both 2010 and 2016, the DOL attempted unsuccessfully to revise this definition. However, following two years of legal battles, the Fifth Circuit Court of Appeals overturned the DOL's 2016 regulations, which sought to broaden the fiduciary standard for advisors to ERISA plans and IRAs.

The DOL has long been concerned about financial advisers who have strong financial incentives to recommend investors roll money into one of their institutions’ IRAs or annuities. The Final Rule closes this loophole and makes it clear that one-time advice is subject to ERISA.

However, as past experiences indicate, potential litigation may still lie ahead, posing further challenges.

Complying with employment laws can prove challenging and time-consuming. However, some organizations adeptly navigate these complexities. As per HR.com's recent study, ‘HR.com’s State of Legal Compliance and Employment Law 2024’, compliance leaders often have a matured compliance function that helps them stay on top of all of their compliance needs. This research report examines the challenges, technologies, and processes of employment law compliance.

This month, we also discuss various other topics, ranging from the recent NLRB ruling reshaping employee voting rights in labor relations and the recent arbitration ruling on deducting Canada Labour Code paid medical leave days against short-term disability benefits to the top strategies for ensuring legal compliance in employment practices.

Will the third time prove to be a charm for the DOL?  Will the Ninth Circuit, on review of the Cemex decision or another court, take action to keep Cemex from taking effect? 

We will have to wait for the final verdict and see how these, and many other rules, will shape the U.S. workforce in the coming months.

Till then, be safe, and be compliant.

Happy reading!
 

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