Federal judge puts DOL retirement advice rule on hold

A federal judge who ruled that opponents of the Labor Department's new retirement advice rule are "likely to succeed" in their legal challenge of the regulation has blocked its scheduled rollout.

Judge Jeremy Kernodle of the Eastern District of Texas ruled on July 25 in favor of the Federation of Americans for Consumer Choice, an industry trade group whose lawsuit called for a preliminary injunction against Labor's new "retirement security rule." That rule will now be on hold "until further order of the court" rather than going into effect this year, Kernodle said. The regulation would require financial advisors and other industry professionals to make recommendations that put the interest of 401(k) plan participants and other retirement savers first when advising them on rollovers or certain insurance sales. After Labor issued the final version of the rule in April, insurance and wealth management trade groups filed two lawsuits.

"Plaintiffs are likely to succeed on the merits of their claim because the 2024 Fiduciary Rule conflicts with [the Employee Retirement Income Security Act] in several ways, including by treating as fiduciaries those who engage in one-time recommendations to roll over assets from an ERISA plan to an IRA," Kernodle said. "DOL's related amendments to Prohibited Transaction Exemption 84-24 are also unreasonable and arbitrary and capricious. For its part, DOL attempts to reconcile the Rule to Chamber [the case that vacated Labor's 2016 fiduciary rule] but fails. Ultimately, DOL contends that Chamber is wrong and unduly limits the agency's authority. But that is an argument for the en banc Fifth Circuit or the Supreme Court. The balance of the factors necessary to issue a stay, moreover, weigh in plaintiffs' favor here."

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Representatives for the Labor Department didn't immediately say whether the agency will seek to appeal the ruling on the injunction motion to a higher court.

"When investors get advice from a trusted financial professional about their retirement savings, they expect that advice to be in the customer's best interest, not the financial professional's," spokesman Grant Vaught said in a statement. "This rule makes that a reality. The Department continues to believe that this rule is essential to ensuring that retirement investors are protected."

Kernodle found in favor of the argument by the plaintiffs and other critics of the rule who contend that Labor's rule is too similar to the one vacated by the Fifth Circuit Court of Appeals in 2018. The new regulation "suffers from many of the same problems" as the prior one, he wrote.

"Plaintiffs are insurance agents who sell annuities and other products to clients rolling over their retirement investments from employer-provided plans (such as 401(k)s) into IRAs," Kernodle said in the decision. "They argue that the 2024 Rule conflicts with ERISA by imposing ERISA-fiduciary status on 'any insurance agent who merely complies with state insurance laws when dealing with an ERISA plan member or owner of an IRA.' And complying with the rule while this lawsuit is pending, they argue, will subject them to 'significant compliance burdens, ... potential liability under ERISA, and potential enforcement actions by DOL.' Plaintiffs therefore seek a stay of the rule's Sept. 23, 2024, effective date, or alternatively, a preliminary injunction enjoining DOL's enforcement of the rule while this case proceeds. The court grants plaintiffs' motion."