A new Labor Department rule that raises the legal bar for investment advice about retirement savings is at risk of being overturned in court, according to attorneys.
The so-called “fiduciary rule,” issued in April, aims to rein in the conflicts of interest that the Labor Department perceives in many recommendations that brokers, insurance agents, financial advisors and others give to investors in 401(k) plans and individual retirement accounts.
Advice to roll money from a 401(k) to an IRA — a common action taken around retirement age — is among the agency’s chief concerns, attorneys said.
Almost 5.7 million people rolled money into an IRA in 2020, according to most recent IRS data. Americans rolled a collective $779 billion to IRAs in 2022, according to a White House Council of Economic Advisers analysis.
‘Almost a certainty’ courts will overturn
However, the fiduciary rule’s survival is in doubt following recent court actions, attorneys said.
Two federal district courts in Texas issued a national “stay” of the regulation, in separate rulings in July.
That effectively indefinitely delays the rule’s Sept. 23 start date while the courts conduct a more detailed review of the lawsuits, which were filed by several insurance industry groups.
“It is almost a certainty that both courts will overturn” the DOL regulation, said Fred Reish, a retirement law expert and partner at Faegre Drinker Biddle & Reath.
One of the courts hinted at that outcome.
“The Rule is almost certainly unlawful for a broad class of investment professionals in the industry — not just Plaintiffs,” according to a July 26 order by the U.S. District Court for the Northern District of Texas, in the lawsuit American Council of Life Insurers v. United States Department of Labor.
The other case is Federation of Americans for Consumer Choice v. Department of Labor.
The rule will “create a level playing field” for all trusted investment professionals, according to a Labor Department spokesperson.
“The insurance industry can continue to advise investors and sell annuities, without giving advice that is imprudent, disloyal, or tainted by misrepresentations or overcharges,” the spokesperson said.
The agency referred questions about an appeal to the Department of Justice, which didn’t immediately respond to a request for comment.
Current retirement rollover advice rules stay in effect
In the meantime, the current status quo remains in effect, attorneys said.
Current rules let brokers give investment advice that earns them a higher commission but isn’t in savers’ best interests, the Labor Department said during the rulemaking process. Insurance products like annuities are a chief concern, attorneys said.
The fiduciary rule is part of the Biden administration’s broader crackdown on “junk fees” shouldered by U.S. consumers across the financial ecosystem.
Meanwhile, industry groups say the court decisions are justified.
“The stay of the effective date provides consumers with a needed reprieve from these devastating consequences as the court considers the substantial legal issues we have raised regarding this ill-advised rule,” according to a joint statement from ACLI, the National Association of Insurance and Financial Advisors, NAIFA-Texas, NAIFA-Dallas, NAIFA-Fort Worth, NAIFA-POET, Finseca, Insured Retirement Institute and the National Association for Fixed Annuities.
The legal conundrum echoes that of a similar Labor Department rule issued during the Obama administration.
The Fifth Circuit Court of Appeals ultimately killed that fiduciary rule in 2018. The Trump administration didn’t pursue an appeal to the Supreme Court.
“The new fiduciary rules are somewhat different than those in the 2018 decision and it’s possible that there could be a different outcome,” Reish said.
However, November’s presidential election is a “wild card,” he added.
“If the Democrats retain control of the White House, they will likely pursue the case all the way to the Supreme Court,” if they were to suffer an adverse ruling, Reish explained.
The litigation may takes years to resolve, attorneys said.
“We are nowhere near a conclusion to the challenges to the 2024 fiduciary rule,” wrote Gina Alsdorf and Stephen Kraus, attorneys at Carlton Fields.
