The US Labor Department must walk a narrow legal tightrope to advance its latest attempt at 401(k) plan fiduciary rulemaking without running afoul of years worth of federal court precedent reining in its regulatory reach.
The DOL’s Employee Benefits Security Administration has now formally launched the third campaign in a decade-long saga aimed at redefining when retail investment advisers are subject to strict fiduciary standards of care.
The agency sent a proposed rule (RIN 1210-AC02) to the White House for review late last week, setting the stage for a showdown between the Biden administration and Wall Street investment advisers.
Broad fiduciary rules and narrow exemptions threaten to shake up the way financial professionals charge for service. The new rule would eliminate dangerous conflicts of interests in the eyes of regulators, but price out affordable advisory services, according to critics.
No matter the finer details of the rule, which will not be made public until the White House has completed its review, the department’s efforts will be complicated by several key federal court decisions that nixed or severely curtailed prior attempts, benefits advisers told Bloomberg Law.
The US Court of Appeals for the Fifth Circuit vacated an Obama administration rule in 2018 that would have thrown out the five-part test historically used to define fiduciary investment advice. Then, earlier this year, a Florida district court struck down subregulatory guidance reinterpreting just a single element in that 1975 test.
A Manhattan federal judge’s ruling in 2022 also rebuked the DOL’s shifting fiduciary standards in a private-sector civil suit involving TIAA.
“I think it’s going to be hard for the Labor Department to get where they’re wanting to go in light of the Fifth Circuit and these other rulings,” said Allison Itami, a benefits attorney and partner at Groom Law Group Chartered in Washington. “Perhaps they will take the position that the courts were wrong, but they’re going to have to build a solid regulatory framework to support a broader fiduciary interpretation.”
In order to advance its latest proposal without running into the legal walls left behind by prior court rulings, advisers predict that EBSA may attempt a middle-ground approach that avoids throwing out the old fiduciary test altogether as the Fifth Circuit did but modifies it just enough to achieve the desired result.
The court battles the agency has already fought offer enough of a glimpse into the inner agency workings to surmise that regulators are likely seeking to temper rollovers from workplace retirement plans into individual retirement accounts and annuities.
“A rollover may be the single most important decision, often an irrevocable one, a person nearing retirement will make about their retirement income,” said David Certner, legislative counsel and policy director at AARP.
EBSA’s last attempt at applying the fiduciary standard to investment advisers recommending a rollover was axed by the Florida court earlier this year for reinterpreting one element in the 1975 fiduciary test that requires an investment advice fiduciary to have an ongoing relationship with their client. The agency’s prior approach reinterpreted that element to mean that first-time advice could be considered “fiduciary” if it formed the start of an ongoing relationship.
Now that the agency will be forced to take the long route by undergoing the arduous notice-and-comment rulemaking process to achieve a modified fiduciary definition, it may take the simple approach of just eliminating the problematic part of the test while preserving the rest, said Fred Reish, a partner at Faegre Drinker Biddle & Reath LLP in Los Angeles.
What doomed the Obama-era rule in the Fifth Circuit was how broad it was, eliminating the entirety of the five-part test. Simply reinterpreting it was too narrow an approach for the Florida district court.
“If the new proposal is intended to be impactful, and I think that it is, it will have to amend the existing regulation to eliminate the ‘regular basis’ part of the five-part test for nondiscretionary fiduciary advice,” Reishsaid. “If that prong is removed, and a four-part test remains, rollover recommendations will be fiduciary advice.”