The Department of Labor’s controversial Fiduciary Rule was sent to the White House Office of Management and Budget for review on Saturday, March 8, and that review is expected to be fast-tracked as the Biden Administration looks to make the rule effective well ahead of the November presidential election.
The DOL’s Employee Benefits Security Administration is proposing the new rule that it says would protect workers’ retirement savings by updating the regulation defining a fiduciary under the Employee Retirement Income Security Act (ERISA). With its official delivery to the OMB on Saturday, the agency now has 90 days to review the rule, technically called the “Retirement Security Rule: Definition of an Investment Advice Fiduciary.”
But many are predicting that review will take between 30 and 60 days instead of the full 90.
“I don’t anticipate they will take the full 90 days to review. The clock is ‘ticking’ to get this rule finalized, which is also why the DOL was so fast in moving to the final rule phase,” Bonnie Treichel, Chief Solutions Officer at Endeavor Retirement, told 401(k) Specialist Monday.
“Keep in mind that the DOL didn’t have to move that fast but the DOL is trying to get this rule finalized so that no matter what happens with the pending election in November, the rule will be effective prior to any potential change in administration,” Treichel added.
“…the DOL is trying to get this rule finalized so that no matter what happens with the pending election in November, the rule will be effective…”
Endeavor Retirement’s Bonnie Treichel
She noted that a change in administration could result in a Presidential direction to stop a prior administrative action as we saw with prior regulations (for example, ESG regulation change from Trump administration to Biden administration).
This latest iteration of the fiduciary rule has been on the fast track since it was originally published in the Federal Register on Nov. 3, 2023. The DOL allowed comments for just 60 days instead of 90 and denied multiple requests from throughout the retirement industry to extend the period. The DOL also took the unusual step of holding public hearings on the proposed rule prior to the conclusion of the comment period. Two days of hearings occurred in mid-December while the comment period concluded on Jan. 2, 2024.
The DOL was flooded with more than 19,000 comments about the rule, with several industry groups urging the department to scrap the rule altogether.
Among the most outspoken of those groups has been the Insured Retirement Institute, which on Saturday released a statement from its President and CEO Wayne Chopus, criticizing the DOL’s decision to send the final version of its “unnecessary and harmful” rule to the OMB.
“IRI is dismayed that the Administration has decided to move forward with its fiduciary investment advice rule despite the evidence presented to DOL about the significant, unnecessary harm this rule will cause to retirement savers and concerns raised by members of Congress from both sides of the aisle,” Chopus said in the statement.
“As proposed, the rule fails to consider the diverse needs of retirement savers and the impact it will have on the ability of workers and retirees to realize the benefits of the SECURE Act and the SECURE 2.0 Act,” Chopus continued. “If the final rule is substantially similar to the proposed version, millions of consumers would lose access to valuable lifetime income products and affordable professional guidance to help them knowledgeably acquire and use those products.”
“If the final rule is substantially similar to the proposed version, millions of consumers would lose access to valuable lifetime income products and affordable professional guidance to help them knowledgeably acquire and use those products.”
IRI’s Wayne Chopus
In 2016, DOL issued a similar rule that a study found caused more than 10 million retirement savers to lose access to their preferred financial professional before a federal appeals court vacated it in 2018.
Chopus called the current proposal functionally equivalent to the now-vacated 2016 rule, and said it ignores the existence and effectiveness of the enhanced federal and state consumer protection regulations that have been enacted since the earlier failed fiduciary rule. “Those new protections require financial professionals to act in clients’ best interests, and there is no evidence to suggest they are not working,” Chopus said.
But others—including the American Retirement Association—say the DOL does need to update the fiduciary rule, in part because the SEC’s Regulation Best Interest (Reg BI) and the NAIC’s Model Rule cover individual investors, not those in retirement plans such as 401(k)s. This results in a regulatory gap that the DOL’s new rule would close.
Recently, California became the 45th state to adopt the NAIC’s best interest regulation that insurance producers must follow when recommending annuity products, meaning that more than 90% of the U.S. population is now covered by it. The NAIC model aligns with the U.S. Securities and Exchange Commission’s Regulation Best Interest (Reg BI).
Changes to rule unknown for now
EBSA Secretary Lisa Gomez has said the originally proposed rule would see some revisions as a result of feedback received during the comment period and the December online hearings. But the public won’t know exactly what changed until the Final Rule is published in the Federal Register upon completion of the OMB review, or—in what most observers say is unlikely—another comment period could be triggered if the revisions are substantial.
Under the Administrative Procedure Act (APA), federal agencies are required to provide the public with notice and an opportunity to comment on proposed regulations, IRI Chief Legal and Regulatory Affairs Officer Jason Berkowitz told 401(k) Specialist Monday. To the extent that an agency modifies a proposal to include provisions that were not reasonably understood to be contemplated by the original notice, the agency is supposed to re-propose.
“Whether an agency should have re-proposed rather than moving to a final rule is typically a question for the courts,” Berkowitz said. “There is a lot of gray area in this analysis, however, and it can be challenging to persuade a court that an agency violated the APA by going to a final rule instead of issuing a new proposal.”
“It can be challenging to persuade a court that an agency violated the APA by going to a final rule instead of issuing a new proposal.”
IRI’s Jason Berkowitz
Endeavor Retirement’s Treichel said there will always be some changes from the proposed rule to the final rule, and this one should be no different. “But my expectation is that largely the cornerstone pieces of the proposal will remain in the final regulation.”
She likened the fiduciary rule as being similar to the ESG final regulation in that it has become a real political hot potato over the years—swinging back and forth with each administration.
“The ESG final regulation, which retirement plan fiduciaries had to follow starting January 30, 2023, did a good job of becoming more neutral and withstanding initial scrutiny in the courts,” Treichel said. “My hope is that based on the proposed regulation this fiduciary rule has also become more neutral to be able to withstand scrutiny in the courts, which allows financial advisors and their clients to more clearly understand the standards that apply.”
IRI, meanwhile, continues to call for the rule to be withdrawn in its entirety.
“We have repeatedly said that DOL should withdraw this proposal, and IRI urges the President and OMB to reject the harmful policies embedded in the proposed rule,” Chopus said in his statement. “If the President and OMB fail to stop this proposal, Congress must act to protect retirement savers and ensure the benefits of the bipartisan SECURE Act and the SECURE 2.0 Act are not in any way jeopardized by this rule.”
What is most probable to happen is that the Final Rule will be published in Federal Register upon completion of the OMB review—probably by the middle of May. The Final Rule’s effective date will be 60 days after that happens, while the applicability date—when financial professionals have to comply with the new rule—will likely be Jan. 1, 2025.
Treichel noted that there is the possibility that a lawsuit filed by an opponent of the Final Rule could result in a “stay” of the rule’s effective date.
SEE ALSO:
- Retirement Security Rule Update: 14 Stakeholders Set to Meet with OMB
- Critics Speak Out Against DOL Retirement Security Proposal During House Committee Hearing
- Fiduciary Rule Comment Letters Flood in to DOL as Deadline Passes
- California’s Adoption of NAIC Annuity Protection Model Means 90% of U.S. Consumers Now Covered
- Key Action Points for Advisors to Consider Ahead of Final Fiduciary Rule
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.