Looks like the Department of Labor is changing tactics when it comes to 401(k) rollover recommendation rules.
It was revealed Monday that the DOL has decided not to pursue an appeal of the recent ruling in a Florida district court that undermined some of its FAQs on the Prohibited Transaction Exemption related to 401(k) rollovers released back in April 2021 (PTE2020-02 FAQs).
The Labor Department has been trying to extend strict fiduciary standards of conduct to cover the kinds of products workplace retirement plan participants can roll their savings into at retirement.
While the DOL’s decision to drop its appeal can be seen as a victory for the American Securities Association, which brought the suit against the FAQs in an effort to “protect investor choice and America’s retirement savers from administrative overreach,” it can also be seen as the DOL abandoning one front to concentrate on another—crafting a new fiduciary regulation that could render the Florida court decision moot.
Employee Benefits Security Administration Assistant Secretary of Labor Lisa Gomez confirmed that the DOL is prioritizing work on a new fiduciary regulation, during remarks last week at the Employee Benefit Research Institute’s 2023 Spring Policy Forum in Washington, D.C.
A press release issued by the American Securities Association on Monday announced that the DOL had voluntarily dismissed its appeal, filed in response to the Middle District of Florida’s Feb. 13 ruling that struck down the DOL’s guidance.
“We are pleased the DOL dropped its appeal of the district court’s decision to strike down its attempt to change existing rules about retirement advice without a formal rulemaking”
ASA’s Chris Iacovella
The ASA said the DOL was attempting to use informal guidance to change existing retirement rules in violation of the Administrative Procedure Act (APA). The guidance stated that a financial advisor’s one-time recommendation to rollover retirement assets may be subject to ERISA fiduciary duties. The district court declared this action “arbitrary and capricious” and vacated it.
“We are pleased the DOL dropped its appeal of the district court’s decision to strike down its attempt to change existing rules about retirement advice without a formal rulemaking,” said Chris Iacovella, President & CEO of the American Securities Association. “The district court correctly held the DOL’s guidance was arbitrary and capricious and had no basis in law. ASA remains dedicated to protecting the rule of law, investor choice, and the rights of America’s working families and retirement savers from the overreach of the administrative state.”
The ASA 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.”
What’s next?
The timing for when the DOL might publish a new fiduciary regulation is uncertain, as a similar challenge to the DOL guidance by the Federation of Americans for Consumer Choice is still awaiting a ruling at a court in Texas, and the Biden Administration is still fighting to get Julie Su confirmed as the Secretary of Labor.
But with the time it takes to propose a regulation, allow for the comment period, finalize the regulation based on the feedback and have it approved and published before it can go into effect, the clock is ticking with about two year’s left in President Joe Biden’s current term in the White House.
Controversial rules such as this that are not completed before the end of an administration are often scrapped by the incoming administration.
SEE ALSO:
• DOL Prioritizing ESG, New Fiduciary Rule and SECURE 2.0 Projects, Says Gomez
• Florida Court Strikes Down DOL Rollover Guidance
• How Well Are 401(k) Advisors Adhering to PTE 2020-02?
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.