Advisors and brokers might want to hold off on reaching for the bubbly to celebrate a recent Florida court decision that promises to reduce their paperwork and compliance burden for recommending retirement plan rollovers.
The Department of Labor recently interpreted a rule in the Employee Retirement Income Security Act of 1974 to mean that financial advisors must act as fiduciaries when moving assets out of clients' 401(k)s and into individual retirement accounts. The U.S. District court in Tampa, Florida,
ERISA, which governs pension and other retirement plans, calls on retirement fiduciaries to act prudently, diversify plan investments to minimize the risk of large losses and disclose conflicts of interest.
The Department of Labor has
A Pew Charitable Trust
"Today, as investors leave workplace plans, they often receive marketing from financial firms nudging them toward IRAs," according to the Pew report. "And the fee disclosures are written in a technical manner that is difficult for the average consumer to understand. Small differences in fees can lead to big losses; consumers could end up making decisions that chip away at their hard-earned retirement savings."
But the plaintiff in the Florida case — the American Securities Association, which lobbies for regional financial services firms — said being an ERISA fiduciary comes with a staggering slate of paperwork and compliance requirements. Advisors and brokers deemed fiduciaries under ERISA, for instance, must provide documentation showing they had considered all the pros and cons of other options, including letting the client's savings stay put.
The Florida court's decision would appear to have lifted much of that burden. But many caution that ruling is unlikely to be the last word.
"But for most people, you might want to keep the champagne on ice," said Nevin Adams, chief content officer at the American Retirement Association.
For one, advisors remain under a separate fiduciary rule — the standard by the Investment Advisers Act of 1940 — to always put their clients' interests first. And brokers are beholden to the Security and Exchange Commission's Regulation Best Interest, which is often deemed a weaker standard but still requires them to look out for investors' interests. So it's not as if planners of either stripe, Adams said, can simply start recommending rollovers without regard for their clients.
Even more important, Adams said, is the possibility that the DOL will file an appeal seeking to have the ERISA fiduciary standard restored for 401(k) rollovers. And the DOL's regulatory
All of that, Adams said, means planners shouldn't be too hasty about ripping up any policies and procedures in light of the Florida court's ruling.
"This is just one court jurisdiction," he said. "I don't know if I'd shift my practice based on what it says."
The DOL referred questions about a possible appeal to the Department of Justice. The DOJ couldn't be immediately reached.
The DOL policy questioned in the Florida case was issued in 2021 as part of 21 "frequently asked questions" planners have about exemptions to the ERISA fiduciary standard. Before that guidance, advisors who made one-off recommendations to rollover a 401(k) were generally not considered ERISA fiduciaries.
But question No. 7 in the list of FAQs seemed to reverse that policy. It held that "the advice to roll assets out of an employee benefit plan into an IRA would be the start of an advice relationship" and could trigger ERISA fiduciary responsibilities, especially in cases when planners were likely to continue working with clients.
In filing its suit, the American Securities Association argued that the interpretation has caused some of its member firms to prohibit their representatives from recommending retirement plan rollovers. The
In ruling against the DOL, District Court Judge Virginia Hernandez Covington found the agency had not followed proper rule-making procedures in issuing its FAQ. Covington specifically deemed the interpretation the DOL offered in question No. 7 "arbitrary and capricious."
The judge's decision notes the suit was brought on behalf of two ASA members: Paul Schultz, the general counsel and a managing director at financial services firm Robert W. Baird; and Ashley Palermo, the director of products and services and private wealth management at the broker-dealer and investment banker Stephens. Neither Schultz nor Palermo responded to requests for comment.
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Other groups that welcomed the Florida court's decision were nonetheless advising financial planners to take it slow. Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute — which represents distributors of annuities and other retirement products — agreed that many pieces of the ERISA fiduciary puzzle still remain in the air.
Although the Insured Retirement Institute was not a party to the ASA, it's happy with the outcome, Berkowitz said.
"But I do think you do need to be cautious," he said. "We'll know in the near future if they are going to appeal. If they do, it will most likely include a request to stay the lower court's judgment pending the outcome of the appeal."
