DOL Process-Based Approach
The DOL has proposed a safe harbor that fiduciaries can rely on when selecting retirement plan investments. The proposed rule provides that when the fiduciary follows a prudent process (i.e., considers the factors enumerated in the new safe harbor), judges should defer to their judgement. The safe harbor identifies six factors that fiduciaries must analyze when selecting investments: (1) performance, (2) fees, (3) liquidity, (4) valuation, (5) performance benchmarks and (6) complexity. The DOL was clear that the safe harbor is not designed to favor any type of investment over another. It applies with respect to alternative investment options, as well as more traditional investment options. The safe harbor is a part of a larger shift in the DOL's enforcement priorities, as the DOL has indicated that it will focus on the fiduciary's process in selecting investments within retirement plans.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about the DOL's newly announced process-based approach to fiduciary enforcement actions.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: The DOL's new process-driven approach will give advisors the certainty that they need to execute valuable retirement investment strategies without the constant fear of litigation. For years, investment advisors have been at the mercy of the courts--never quite sure whether their choices would be found adequate. The change in focus on the part of the DOL is a welcome change for investment advice fiduciaries and the retirement investors they serve.
Bloink: Yes, it's important that advisors exercise prudence in the process that they use to select investment lineups. That said, the DOL's laser-focus on process ignores critical facets of the investment advisor fiduciary's responsibilities toward retirement investors. The DOL is clearly taking a check-the-box approach. While that may seem helpful on the investment advice fiduciary's side, this approach cannot replace meaningful fiduciary oversight--and the DOL's new safe harbor seems to ignore the fiduciary's duty of loyalty and monitoring entirely.
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Byrnes: We can't continue to judge investment advice fiduciaries in hindsight, based on market performance when they have no control over actual outcomes. Investment advisors do have control over the process they use to make investment decisions. When investment advisors follow a prudent process, they should be protected even if the outcomes aren't what they hoped for.
Bloink: We have to remember that outcomes do matter. Initial approaches may not pan out in the long run--and any fiduciary has a plain obligation to continue monitoring their investment lineups to ensure they're furthering the investor's goals. This DOL safe harbor appears to broadly gloss over this obligation with their process-based focus.
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Byrnes: The bottom line is that even the best investment advisor can't predict investment outcomes with 100% certainty. When they're forced to live with the constant fear of litigation, they're likely to take only safe bets--and that's not going to pay off for everyday investors in the long run. This new approach opens the door to an entire new world of investment options—and will give ordinary, hardworking Americans access to the types of high-growth investments that they need to secure their retirements.
Bloink: In the long run, this new process-based approach provides investment advice fiduciaries with a false sense of security. A mere check-the-box approach will never hold up in court—especially in this new post-Chevron era, where the courts are expected to form their own judgements, rather than to defer to government agency rules. Investment advice fiduciaries may be owed a degree of deference under this second Trump DOL regime, but they cannot be shielded fully from liability if they choose to hide behind the new check-the-box approach.