Slow your rollover guidance, DOL.
On Monday, a federal court in Tampa, Fla., handed down a verdict in a case brought by the American Securities Association last February challenging the U.S. Department of Labor’s attempt to change existing retirement rules without going through a notice-and-comment rulemaking as is required under the Administrative Procedure Act (APA).
“ASA is pleased the court recognized the DOL operated outside the scope of its legal authority and vacated its unlawful policymaking through guidance”
ASA CEO Chris Iacovella
The Middle District of Florida court ruled that DOL’s interpretation of the five-part test determining who qualifies as a fiduciary under ERISA was “arbitrary and capricious,” and sided with the ASA in determining that the DOL overstepped its authority with certain parts of its Frequently Asked Questions in relation to Prohibited Transaction Exemption 2020-02.
The suit focused on two FAQs in particular: Question 7, When is advice to roll over assets from an employee benefit plan to an IRA considered to be a on a “regular basis”? and Question 15, What factors should financial institutions and investment professionals consider and document in their disclosure of the reasons that a rollover recommendation is in a retirement investor’s best interest?
While the Florida court sided with the DOL on Question 15, it agreed with the American Securities Association on FAQ 7 and declared it unlawful, noting, “Because the policy referenced in FAQ 7 conflicts with the Department’s existing regulations, it is an arbitrary and capricious interpretation of the 1975 Regulation.” It vacated the policy as a violation the Administrative Procedures Act (APA) and “remanded it to the Department of Labor for further proceedings consistent with this Order.”
In its verdict, the court determined that at least one ASA member firm, a wealth management firm that works with clients to “identify specific investment goals [and] build an investment strategy,” suffered a “concrete injury-in-fact” because the firm no longer provides advice pertaining to rollover recommendations as a consequence of the challenged guidance.
The decision said FAQ 7’s gloss on the definition of fiduciary affects that interest because the firm now “prohibits its investment advisors from recommending that an investor roll over assets out of an employee benefit plan.”
Because the firm has elected to no longer provide certain services in response to the Department’s guidance, the effect of FAQ 7 on its operational and business decisions is sufficient to establish an injury-in-fact.
It is widely expected that the DOL will appeal the decision, and the issue is unlikely to be decided in the coming year or perhaps even multiple years.
“ASA is pleased the court recognized the DOL operated outside the scope of its legal authority and vacated its unlawful policymaking through guidance,” ASA CEO Chris Iacovella said. “ASA filed this lawsuit to protect investor choice and America’s retirement savers from administrative overreach and the Court agreed the DOL’s failure to seek public comment before changing its rules about retirement advice was a violation of the Administrative Procedure Act.”
American Retirement Association CEO said in an article on the National Association of Plan Advisors (NAPA) website that the DOL may well respond to this decision regarding the FAQs by modifying or eliminating the “regular basis” prong of the five-part test in the regulation itself in its pending, proposed changes to the fiduciary rule.
ASA said in a statement Monday it filed the lawsuit to protect investor choice and America’s retirement savers from administrative overreach. To read a copy of ASA’s lawsuit, click here.
SEE ALSO:
• How Well Are 401k Advisors Adhering to PTE 2020-02?
• IRA Assets Approach $14 Trillion Thanks to 401(k) Rollovers
• Fred Reish Fears Advisor PTE Preparedness
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
