Acting Labor Secretary Julie Su recently testified before the Senate Appropriations Committee on May 9, 2024, discussing the 401(k) rollover advice rule and its impact on retirement savers. The rule, which was set to take effect on September 23, has faced uncertainty due to recent court actions. Specifically, two federal district courts in Texas issued a national “stay” of the regulation in separate rulings in July. This delay effectively puts the rule on hold while the courts conduct a more detailed review of the lawsuits filed by several insurance industry groups.
Fred Reish, a retirement law expert and partner at Faegre Drinker Biddle & Reath, expressed his belief that both courts will overturn the DOL regulation. In fact, one of the courts hinted at this outcome in a July 26 order, stating that the rule is likely unlawful for a broad class of investment professionals in the industry. The other case, Federation of Americans for Consumer Choice v. Department of Labor, also raises concerns about the rule’s legality.
Despite the legal challenges, the Department of Labor maintains that the fiduciary rule aims to create a level playing field for all trusted investment professionals. A spokesperson for the agency stated that the rule would prevent advisors from providing advice that is imprudent, disloyal, or tainted by misrepresentations or overcharges. However, questions about a potential appeal were directed to the Department of Justice, whose spokesperson declined to comment on the matter.
While the fate of the fiduciary rule remains uncertain, current retirement rollover advice rules continue to stay in effect. These rules allow brokers to give investment advice that may prioritize higher commissions over savers’ best interests. Notably, insurance products like annuities have been a key concern in this context, as they often come with complex fee structures and potential conflicts of interest.
The fiduciary rule is part of the Biden administration’s broader efforts to address “junk fees” that impact U.S. consumers in the financial sector. Industry groups, including the American Council of Life Insurers, the National Association of Insurance and Financial Advisors, and others, have supported the court decisions to delay the rule’s implementation. They argue that the rule could have significant negative consequences for consumers and that further legal review is necessary.
The legal challenges surrounding the fiduciary rule echo a similar situation that occurred during the Obama administration. In 2018, the Fifth Circuit Court of Appeals struck down a fiduciary rule issued by the Labor Department, a decision that was not appealed by the Trump administration. However, experts like Fred Reish point out that the current fiduciary rules differ from those in the 2018 case, suggesting that the outcome could be different this time around.
Looking ahead, the upcoming presidential election in November adds a layer of uncertainty to the situation. Reish notes that if Democrats retain control of the White House, they may pursue the case all the way to the Supreme Court in the event of an adverse ruling. As such, the litigation surrounding the fiduciary rule is expected to continue for years before a final resolution is reached.
In conclusion, the 401(k) rollover advice rule faces challenges and uncertainties as courts review its legality. The outcome of these legal battles will have significant implications for retirement savers and investment professionals alike. Stay tuned for updates as the situation unfolds.