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Artificial intelligence systems that help consumers with annuities or individual retirement arrangements or take other steps to prepare for retirement could face regulatory changes as a result of the latest developments in the fight over the U.S. Department of Labor's retirement investment fiduciary definition.
Two federal courts have blocked the version of the definition completed by the administration of former President Joe Biden in 2024. The definition that was blocked would have applied to advisors who help retirement savers roll assets from 401(k) plans, IRAs and other retirement plans into new arrangements.
The Labor Department and its employee benefits arm, the Employee Benefits Security Administration, announced in a notice published in the Federal Register Friday that the department would not try to develop a new retirement fiduciary definition.
Officials said in the same notice that they have also decided to "vacate," or cancel, a related document: the preamble to Prohibited Transaction Exemption 2020-02, a document that discusses how retirement investment advice fiduciaries can get paid.
That change could affect AI advisors, because part of the PTE 2020-02 talks about how the Labor Department sees robo-advisors.
When the department updated the PTE 2020-02 preamble in 2024, officials emphasized their respect for robo-advisors' potential value.
Keeping robo-advisors out of the exemption "could reduce access to an important and cost-effective means of delivering investment advice," officials said.
What it means: AI companies and their lawyers may need to ask Labor Department officials for their thoughts about what, if anything, the repeal of the PTE 2020-02 preamble means for robo-advisors.
Prohibited transaction exemptions: The Employee Retirement Income Security Act of 1974 sets a strict fiduciary standard for anyone who works with retirement plans and retirement savers.
The Labor Department often sets rules by telling advisors what they can do, by issuing exemptions for activities that normally would be blocked by ERISA, rather than by setting limits on what advisors can do.
The PTE 2020-02 preamble: Much of the preamble to PTE 2020-02 discusses strategies for determining which investment advisors are fiduciaries.
One section addresses regulation of robo-advisors.
The version of PTE 2020-02 completed in 2020 excluded robo-advisors.
In the preamble to the 2020 version of the exemption, officials defined "robo-advice" to include "investment advice generated solely by an interactive website in which computer software-based models or applications provide investment advice based on personal information each investor supplies through the website, without any personal interaction or advice with an investment professional."
"The conditions of this exemption are not designed to address advice without an investment professional," officials said.
In 2024, when Biden administration officials updated PTE 2020-02, they included robo-advisors.
The Labor Department "understands that financial institutions may use a combination of computer models and individual investment professionals to provide investment advice and implement a single set of policies and procedures that governs all investment recommendations," officials said in the preamble to the 2024 version of the exemption. "Like any other investment advice arrangement, financial institutions relying on computer models must satisfy the exemption's impartial conduct standards and other protective conditions in order to receive exemptive relief."
PTE 2020-02 preamble history: Commenters from some financial services companies and organizations, including TIAA and the Investment Company Institute, argued in favor of treating robo-advisors like live-human advisors in 2020.
Many financial services industry commenters argued that excluding robo-advice from the exemption purely because the advice came from automated systems was illogical.
In 2024, when the exemption and the preamble were updated, a commenter from Hub, a retirement advice provider, praised the move to improve the treatment of robo-advisors, but representatives from Ameriprise, the American Council of Life Insurers and the Alternative & Direct Investment Securities Association objected, seeing the change in treatment for robo-advisors as an attack on the value of commission-based advice coming from live-human financial professionals.
The new Labor Department approach: Department officials said in the notice posted Friday that court rulings on the Labor Department's investment fiduciary definition and PTE 2020-02 have knocked out many parts of the PTE 2020-02 preamble.
Parts of the preamble not clearly related to the fiduciary definition have survived, but the court rulings "leave in their wake too much ambiguity regarding what portions of the preamble guidance remain valid and reliable," officials said in the notice.
The Labor Department did not discuss robo-advice issues in the preamble to the new notice.
They did re-publish the PTE 2020-02 text.
The exemption does not apply if "the transaction is a result of investment advice generated solely by an interactive website in which computer software-based models or applications provide investment advice based on personal information each investor supplies through the website, without any personal interaction or advice with an investment professional (i.e., robo-advice)," according to the PTE 2020-02 text.
Implications: Kent Mason, an attorney with Davis & Harman who has represented groups that have opposed the 2024 retirement investment fiduciary definition, said in an email that he thinks the 2024 move to include robo-advisors in the PTE 2020-02 exemption was "based on a strong preference for fee-based advice (which includes robo advice) over commissioned-based assistance."
"The result would have been to make commission-based assistance more expensive and harder to get," Mason said. "These efforts were both invalid and bad policy, since low and middle-income individuals overwhelmingly use commission-based assistance."
By backing the traditional five-part test for identifying retirement fiduciaries, "the current DOL is making a very appropriate decision to preserve a level-playing field for all forms of assistance, so that individuals can choose how to get their assistance in the way that best suits them," Mason said. "For some, that is and will continue to be robo advice. For others, different forms of assistance are equally available and may be preferred."
Credit: Alexander Limbach/Adobe Stock
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