DOL to appeal court stays on fiduciary rule for retirement advice

The Department of Labor is appealing two stays placed by Texas courts on its new fiduciary rule for retirement-related advice.

The rule, released in April, was scheduled to take effect on Monday but was instead postponed by preliminary injunctions handed down in late July by a pair of federal district courts in Texas. 

The Biden Administration's Retirement Security Rule, as it's officially called, would bring financial professionals under the fiduciary duty to always put their clients' interests first when they do things like recommend 401(k) rollovers or the purchase of annuities or other insurance products.

The Department of Labor's notices of appeal come in cases filed separately in the U.S. District Court for the Northern District of Texas by the American Council of Life Insurers and eight other insurance trade groups, and in the federal court for the Eastern District of Texas by the Federal of Americans for Consumer Choice and various independent insurance agents. In issuing their stays, judges in both courts found that the new retirement security rule clashes with the Employee Retirement Security Act of 1974 — the country's bedrock retirement law — in various ways. They also opined that the new rule is too similar to a previous DOL fiduciary standard for retirement advice vacated by the Fifth Circuit Court of Appeals in 2018.

The Department of Labor's latest filings, submitted on Sept. 20, both merely give notice that the judges' injunctions of the new fiduciary rule are being appealed. A spokesperson for the DOL directed questions to the Department of Justice, which did not immediately respond to a request for comment.

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Brad Campbell, a partner at the Faegre Drinker law firm in Washington, D.C., and previously the head of the DOL's Employee Benefits Security Administration, said it's impossible to glean from the department's court filings what exactly the argument will be on appeal. Judging by previous briefs, Campbell conjectured that the DOL is likely to contest the notion that the new rule isn't significantly different from the previous, now-vacated fiduciary standard.

"To be clear, this is just a guess, as the appeal hasn't even been docketed yet, but it seems a likely approach," he said in an email.

The DOL's new fiduciary rule was released as both contributions to individual retirement accounts and purchases of annuities were soaring. The Investment Company Institute, for instance, has reported that $13.8 trillion was held in IRAs by the end of 2023. IRA holders younger than 50 can contribute as much as $7,000 this year, or $8,000 if they're over 50, without having to pay taxes on it until they withdraw it in retirement.

Annuities, insurance products that provide retirees with a steady stream of income, have meanwhile been hitting records. Total U.S. annuity sales hit $113.5 billion in the first quarter, showing a 21% year-over-year increase.

Amid these trends, concerns have grown that savers were being led by retirement advisors to pay too much for certain services or certain insurance products. Retirement advice given as part of an ongoing relationship now generally triggers advisors' fiduciary duty to always put their clients' interests first.

But certain recommendations — such as suggesting someone buy an annuity or move money out of an employer-sponsored 401(k) plan and put it into an individual retirement account  — falls under an exemption for "one-time advice." The new fiduciary rule was meant to close what the DOL deemed a "loophole." 

That regulatory gap became a topic of debate at a meeting of the Securities and Exchange Commission's Investment Advisory Committee on Thursday. Edwin Hu, an associate professor at University of Virginia School of Law and former SEC economist, noted that many insurance sellers fall under neither the federal fiduciary conduct standard for financial advisors nor the similar Regulation Best Interest standard for broker-dealers.

They're instead regulated by the states, he said. Many states, he said, "have very important exceptions, like for example, not treating commissions as creating potential conflicts of interest, which in theory would allow insurance salespeople to sell more expensive products — to sell products that pay them a higher commission that may not be as good for investors."

Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute, countered at the same meeting that the new proposed fiduciary rule would probably cut off certain low and medium-income savers' access to retirement advice. Representatives of the insurance industry have long maintained that certain insurance sellers would simply stop working with certain clients rather than shoulder the higher cost of complying with a stricter conduct standard.

Berkowitz said there's scant evidence that the current regulatory system is failing to offer adequate protections to savers.

"So in the interest of addressing these hypothetical gaps, we're putting rules in place that are going to make it harder for anybody to get access, especially those on the lower end of the income scale," he said. "And that's where we know that's one of the failings of our society, is that that tends to be more in those underserved communities."