What's next with the DOL rule proposal? Here's what to expect

As supporters and opponents of the Labor Department's retirement advice rule proposal ramp up the debate, it could be the most important regulatory issue in wealth management in 2024.

Next week, the agency will host a public hearing on the "retirement security rule" with testimony from more than three dozen stakeholders among industry trade groups, consumer advocates, academics, financial advisors and other wealth management and insurance professionals. Public comments on the proposal are due Jan. 2, and the potential regulation has already drawn more than 2,700 of them. The rule would alter the definition of "fiduciary" to put tougher scrutiny on advice for 401(k) plan participants, individual retirement account holders and other savers when recommending transactions such as rollovers and certain annuity sales. The proposal's backers say it would close loopholes in the current guidelines for pricey product sales, while critics argue the agency is rushing to create unnecessarily burdensome new requirements.

"We're looking at this thing going into effect some time in late Q2 or Q3," Jason Berkowitz, chief legal and regulatory affairs officer of the retirement and insurance industry advocacy group Insured Retirement Institute, said in an interview. "The sooner they get this done, the more insulated it is from a new administration or a new Congress taking steps to reverse whatever they come up with."

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Berkowitz predicted that the agency would issue the final rule by the end of the first quarter in 2024 or in the early part of the second one. The timing could depend on the amount of testimony at the hearing and number of comments for review, according to Bonnie Johnston, a senior policy counsel for public policy consulting firm LXR Group, which represents some proponents of the Labor Department's proposal. Amid calls for more time to review and comment on the rule, she noted that some agency rulemakings last only 30 days.

"Sixty days is a reasonable comment period," Johnston said. "The timing is always something that industry is going to complain about if you're trying to stop a rulemaking."

Representatives for the Labor Department didn't respond to emails seeking comment on the potential timeline or the calls for more time.

U.S. Rep. Virginia Foxx, a Republican from North Carolina, sent a letter to Acting Labor Secretary Julie Su last month asking that Democratic President Joe Biden's administration double the amount of time for comment on the "damning fiduciary rule" and push back the date of the hearing.

"Any regulations that could alter the methods and relationships currently delivering retirement advice to American workers will have far-reaching implications," Foxx wrote. "It is critical that stakeholders are afforded the opportunity to evaluate and provide substantive and informed comments on the proposal."

READ MORE: 3 ways Biden's 'retirement security rule' could affect financial advisors

The largest firms in the industry have begun preparing for possible changes to comply with the rule, which LPL Financial CEO Dan Arnold said this week would give a strategic advantage to giants like his firm that have the resources to manage a shift in regulation. In an interview with a Goldman Sachs analyst at an investor conference, Arnold discussed the 60-day comment period as well. 

"So in early January, the industry has to respond," Arnold said. "It's likely that the rule, if it does become effective, there will be an attempt to make it effective in late spring and then there will be an implementation period of which then the industry works to comply with the new rules and regs. And they'll likely take that approach to try to avoid it getting caught up in the election process. It's reasonable to believe that there will be litigation along the way that may change that path from a timing and/or ultimately whether the rule ultimately becomes effective. So there's a lot of game left to play and uncertainty around that. That said, we're preparing as if the rule is going to be effective."

Labor's public hearing could see testimony from as many as 45 different stakeholders who have requested time to share their views with officials from the agency's Employee Benefits Security Administration. The group includes the American Retirement Association, Cetera Financial Group, the Investment Company Institute, the National Association of Insurance and Financial Advisors, the Securities Industry and Financial Markets Association, the U.S. Chamber of Commerce, the AARP, the Public Investors Advocate Bar Association, the Consumer Federation of America, the Financial Services Institute, Better Markets, the CFP Board, the American Bankers Association, Betterment, Public Citizen, the AFL-CIO, the American Investment Council, the Insured Retirement Institute, the Institute for the Fiduciary Standard, the Financial Planning Association and the National Association of Personal Financial Advisors.

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Despite a lot of criticism from industry trade groups, there are "plenty of financial professionals" who are supporting the rule, Johnston said. She rejected the notion that the proposal could effectively put some independent insurance agents or other small companies out of business.

"The vast majority of retirement professionals and investment advisory professionals do the right thing and want to do the right thing," Johnston said.

Furthermore, Johnston asserted that many retirement savers "are not aware of what kind of rights they have" under the current guidelines.

"Supporters are viewing this as a significant improvement to the status quo," she said. "At some point, every American in this country is going to be in the retirement phase, and you'd hate for workers and retirees to work their whole lives and then lose their life savings. … I think they will take all comments and testimony under advisement and it will be a comprehensive effort by the DOL to release the final rule."

Opponents view Labor's proposal as one that would "significantly limit the access of financial professionals" to prohibited transaction exemptions in the Employee Retirement Income Security Act enabling advisors and other industry professionals to provide retirement advice, according to Berkowitz.

"Many independent insurance producers will have no viable path to continue serving retirement savers," he said.

He contended that the agency is "inappropriately infringing on the jurisdiction of other regulatory bodies" in a manner forbidden by the 2018 court decision that vacated the 2016 fiduciary rule. Labor's cost estimates in the rule proposal didn't fully take into account the potential cost of the regulation and the risk of retirement savers losing the ability to work with a professional advisor, Berkowitz said. The institute is also concerned that a provision enabling the agency to ban professionals and companies from their regulatory exemption for up to a decade after a conviction for any crime "seems insane," he said.

Overall, the proposal would attach the "fiduciary status" to "almost anyone who has any interaction with a retirement saver," Berkowitz said. "It typically is something that arises only when there's a special relationship of trust and confidence."